Equity markets 2b

Reasons for Market Efficiency
Many investors
Investors have access to the same information
Investors use similar valuation techniques
Market price reflects the demand and supply at a given point
What are investors doing if a they find
shareprice too low? What happens with
the price?
Market Efficiency
Weak - future equity prices cannot be established by analysing historic trends
and returns
Medium - one cannot calculate future
equity price moves with help of technical
analysis and fundamental analysis (based
on publicly available information)
Strong - even an investor who has inside
knowledge about the Company cannot
foresee future returns.
Market Efficiency
Returns are of random character
Fundamental factors are reflected in the
market price
Price anomalies disappear
Investors cannot systematically find
extraordinary returns (alpha
Market Efficiency - Reality
In a developed market like the United States market-wide movements explain only 3 percent of the daily variation of individual stock, while in emerging countries such as Taiwan and Poland they explain far more (approximately 40% and 60% )
What is not implied? Common Misinterpretations
stock prices cannot deviate from true value
◦ there can be large deviations from true value, but they need to be random.
no investor will 'beat' the market in any time period
◦ Approximately half of all investors should beat the market in any period.
no group of investors will beat the market in the long term
◦ A group of investors can beat the market not because of strategy but because they are lucky.
What about exit risk
in case of public equity?
What equity market can be described as safe?
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