| Efficient Market Theory |
Article Index for Efficient |
Website Links For Market |
Information AboutEfficient Market Theory |
|
The theory assumes several things including (1) Perfect Information , (2) instantaneous receipt of news, and (3) a marketplace with many small participants (rather than one or more large ones with the power to influence prices). The theory also assumes that (4) news arises randomly in the future (otherwise the non-randomness would be analysed, forecast and incorporated within prices already). The theory predicts that the movements of stock prices will approximate Stochastic Processes , and that technical analysis and statistical forecasting will most likely be fruitless. This efficient process of price determination can be contrasted with an inefficient market in which, according to the theory, the pre-conditions for efficient pricing ( Perfect Information , many small market participants) have not been met and prices may be determined by factors such as Insider Trading , institutional buying power, misinformation, panic and Stock Market Bubbles and other collective cognitive or emotional behavioral biases. A central part of this theory is the Efficient Market Hypothesis . SEE ALSO |
|
|