Market Efficiency Theory - Essay

1481 Words Mar 31st, 2010 6 Pages
“Every event, no matter how remote or long ago, echoes across all other events.” (Mandelbrot, 2004) Modern financial implications perceive every action/reaction on markets as a result/cause of more complex, mutually dependent events. Studies of these relations began with the simplest ‘random walk’ hypothesis stating that price reactions are unforecastable. It was supported by ‘martingale’ stochastic process. Theoretically it is not possible to fully exist, as there would be no place for speculation and participants would become more like gamblers than stock traders. However it laid foundations to further studies. Use of more sophisticated technology enabled to determine non-random movements and anomalies in asset prices. Suspicious …show more content…
unit trusts) is in indexed funds. For the USA figure is 35 per cent” (Arnold, 2009). The most surprising is the fact that their average return over perform short-term traders and those who chose thoroughly analysed set of shares. As a resultant of this trend it is noticed that the rest of investors tend to trade independently (without broker consultations). Strong form of efficiency is generally perceived as unlikely to exist thus participants acknowledge the power of information. Currently companies are pressured to disclose more accurate and up-to the-minute announcements which make markets more dynamic and flexible. It is another highlight of EMH impact on current trading practices. Company’s approach to the market, relying on the EMH basis, concern slightly different matters. Belief in power of information has created adjusted manager’s approach to numerous situations. Creative accounting is the best example of huge effort of directors to present the best possible current business condition (Atrill & McLaney, 2008). It is followed by disturbing concentration on short term appearance that often cause negative results for shareholders in a long run. Decision making process on particular investment used to rely on NPV mentioned before. Now even really good provident plan can be rejected because of low accounting rate of return (ARR) that would question company’s performance. These operations are aiming to deceive participants and create

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