Weak Form Market Efficiency Essay Example | Topics and Well Written Essays - 4250 words

Weak assortment Market Efficiency - Essay ExampleHowever finance theory assumes idealistic models for the stock markets and formulates the investor returns functions and expectations accordingly. These models are based on perfect competition and passage of information in an unfettered manner. As Wikipedia (2007) seems to point out, In economics and financial theory, analysts use random walk techniques to model behaviour of summation prices, in particular share prices on stock markets, currency exchange rates and commodity prices. This set has its basis in the presumption that investors act rationally and without bias, and that at any moment they estimate the range of an asset based on future expectations. Under these conditions, all existing information affects the price, which changes only when newly information comes out. By definition, new information appears randomly and influences the asset price randomly.Empirical studies have show that prices do not completely follow ra ndom walk. Low serial correlations (around 0.05) exist in the improvident term and slightly stronger correlations over the longer term. Their sign and the strength depend on a florilegium of factors, save transaction costs and bid-ask spreads generally make it impossible to earn excess returns. Researchers have tack that some of the biggest prices deviations from random walk result from seasonal and temporal patterns. In particular, returns in January significantly outgo those in some other months (January effect) and on Mondays stock prices go down more than on any other day. Observers have noted these effects in many different markets for more than half a century, but without succeeding in giving a completely satisfactory explanation for their persistence. Technical analysis uses to the highest degree of the anomalies to extract information on future price movements from historical data. But some economists, for example Eugene Fama, lay out that most of these patterns occu r accidentally, rather than as a result of irrational or inefficient behavior of investors the huge amount of data available to researchers for analysis allegedly causes the fluctuations. Another school of thought, behavioral finance, attributes non-randomness to investors cognitive and emotional biases. Taking an apposite viewpoint Leverton () states, Without market fundamentals being able to predict prices, the investor is constrained to learn new ways of investing.. Ratios and trend analysis are important to picking a benignant portfolio. Subscribers to the adaptive expectations theory believe investors arebackward looking in deciding on the temper price to pay for a stock. Realized and expected rreturns from the stock markets have been the subject of terrific debate since a long period of time .Several theories suggesting various constructs and factors responsible for determining the returns from the stocks have been postulated so far.It was not until the late 1960s and earl y 1970s that a fully-developed, empirically-supported theory of share prices behavior emerged in the form of the Efficient Markets Hypothesis (EMH).Prior to the development of the EMH , analysts assumed some degree of dependence across victorious price changes. Very many efforts were made towards identifying a predictable trading pattern which could be apply for chasing profitable deals. From the mid-1950s to the early 1980s, a random walk theory (RWT) of share prices was developed based on the past empirical evidence of randomness in share price movements. RWT