FINC3017 : Topic-6-Market-Efficiency
Document Summary
The efficient market hypothesis: market anomalies, behavioural finance and market efficiency. If value is greater (lower) than price, the investor will buy (sell) If market efficiency holds, price will equal value: but because different investors hold different perceptions about value, their views of market efficiency also differ. Information and expectations: recall that an informationally efficient market is one in which current prices fully reflect available information about a security in an instantaneous and unbiased manner. The fundamental value of a security is the value of its future cash flows discounted at the relevant cost of capital: pv of security = . Where e(ct) is the expected cash flow in period t and e(rt) is the expected periodic required rate of return: value is thus dependent on expectations about future cash flows and about future risk. Fully reflect means that prices incorporate all information that relevant to the determination of the fundamental value of the security.
