{"id":31073,"date":"2015-05-18T08:23:26","date_gmt":"2015-05-18T08:23:26","guid":{"rendered":"http:\/\/vskills.in\/certification\/blog\/?p=31073"},"modified":"2024-04-03T13:17:01","modified_gmt":"2024-04-03T07:47:01","slug":"the-theory-of-efficient-markets","status":"publish","type":"post","link":"https:\/\/www.vskills.in\/certification\/blog\/the-theory-of-efficient-markets\/","title":{"rendered":"The Theory of Efficient Markets"},"content":{"rendered":"

\"The<\/a><\/p>\n

The concept of an efficient market is very important in the area of finance. An efficient
\nmarket is one in which information is processed in an efficient and rational manner. In an
\nefficient market each investor\u2019s expectations about security returns are (correctly) based on all information available to that investor. This is usually stated as follows: In an efficient
\nmarket, (equilibrium) prices \u201cfully reflect\u201d available information.
\nThe theory and empirical evidence of efficient markets is usually stated in terms of
\nthe behavior of prices over time and of the adjustments of the equilibrium prices to the
\nrelease of \u201cnew\u201d information. As such, much of the treatment of efficient markets must be
\npostponed until the models of equilibrium have been developed. Nevertheless, the concept
\nof market efficiency is so important and so basic to finance that its introduction belongs
\nhere.
\nThe history of the theory of efficient markets dates back at least to the turn of the century when Louis Bachelier, in Theorie de la Speculation (1900), described security prices
\nby using the equations of Brownian motion. (In fact, this description of the equations of
\nBrownian motion predates that of Albert Einstein\u2019s development of them in the physical
\nsciences.) The recent interest in efficient markets which has led to the substantial literature
\non rational expectations, among other things, was kindled by the study of security prices
\nduring the late 1950s and early 1960s.
\nThe importance of the theory of efficient markets comes from its predictions about the
\naggregation and revelation of the information embodied in the equilibrium prices. That
\nis, in an efficient market, investors can learn information that they did not already know
\nby observing the prices of marketed assets. As is usual in economics, we assume that no
\ntrading takes place out of equilibrium. That is, investors observe the equilibrium prices
\nprior to being committed to their trade contracts. (The mechanism usually assumed to
\nachieve the equilibrium is the Tatonnement, or \u201cprice-contingent,\u201d auction described in
\nmost introductory economics texts.)
\nThis learning can be illustrated most clearly in a riskless economy. There is, however,
\na drawback to this approach. Although much of the intuition for efficiency can be gained
\nby looking at riskless economies, a market is efficient in a riskless economy only if there
\nare no arbitrage opportunities. Therefore, in this case, the lack of efficiency has an overly
\ndramatic appearance.<\/p>\n

Click here for government certification in Accounting, Banking & Finance<\/a><\/p>\n

 <\/p>\n","protected":false},"excerpt":{"rendered":"

The concept of an efficient market is very important in the area of finance. An efficient market is one in which information is processed in an efficient and rational manner. In an efficient market each investor\u2019s expectations about security returns are (correctly) based on all information available to that investor. This is usually stated as…<\/p>\n","protected":false},"author":625,"featured_media":31095,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_joinchat":[],"footnotes":""},"categories":[1519],"tags":[1912,2411,2254,909,2583,2025],"class_list":["post-31073","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-accounting-banking-and-finance","tag-contracts","tag-efficiency","tag-markets","tag-risk","tag-theory","tag-trade"],"acf":[],"yoast_head":"\nThe Theory of Efficient Markets - Vskills Blog<\/title>\n<meta name=\"description\" content=\"The concept of Efficient Markets and the theory of The Theory of Efficient Markets. Apply for a Vskills certification in Finance now. 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