FNCE20001 Lecture Notes - Lecture 12: Capital Market, Market Risk, Observational Error
Document Summary
Emh states that all relevant information is accounted for. A market is informationally efficient if prices instantaneously and unbiasedly reflect all available, relevant information efficient market hypothesis. Prices react immediately profits can"t be made from news. Any unexpected "news" is fully reflected in the price by the time of the next trade. An unbiased price reaction occurs when the market price neither overreacts nor underreacts to new information in a systematic manner. Note: it is possible for some investors to over/underreact (bias), as long as the market as a whole reacts in an unbiased way. Large number of profit-maximising participants who analyse and value securities independently of each other. New information comes to market in a random manner unable to predict. Timing of news announcements is independent of each other. Market participants adjust their estimates of security prices rapidly to reflect their interpretation of the new information received. Some participants may over-adjust and others may under-adjust.
