Market Efficiency

Article / Finance and Investing

Market Efficiency
Aasif shah , Student (University), India

Explanation of the concept of market efficiency.

The concept of efficiency is central to finance. Primarily, the term efficiency is used to describe a market in which relevant information is impounded into the price of financial assets. This is the primary focus of the articles reviewed here. Sometimes, however,economists use this word to refer to operational efficiency, emphasising the way resources are employed to facilitate the operation of the market. Most of this review is concerned with the former definition, namely the informational efficiency of financial markets. At the end of this paper, we also consider the microstructure of financial markets.If capital markets are sufficiently competitive, then simple microeconomics indicates that investors cannot expect to achieve superior profits from their investment strategies. But although this appears self-evident today, it was far from obvious for the majority of the century. Up to the end of the 1950s, there were few theoretical or empirical studies of securities markets; and until Cootner (1964) collated a selection of papers from a wide variety of sources, the literature was dispersed across journals in statistics, operations research,The concept of market efficiency had been anticipated at the beginning of the century in the dissertation submitted by Bachelier (1900)** to the Sorbonne for his PhD in mathematics. In his opening paragraph, Bachelier recognises that “past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes”. This recognition of the informational efficiency of the market leads Bachelierto continue, in his opening paragraphs, that “if the market, in effect, does not predict its fluctuations, it does assess them as being more or less likely, and this likelihood can be
evaluated mathematically”. This gives rise to a brilliant analysis that anticipates not only Albert Einstein’s subsequent derivation of the Einstein-Wiener process of Brownian motion, but also many of the analytical results that were rediscovered by finance academics in the second half of the century. Sadly, Bachelier’s contribution was overlooked until it was circulated to economists by Paul Samuelson in the late 1950s (see Bernstein, 1992) and subsequently published in English by Cootner (1964mathematics and economics.

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