Market Efficient Respect Set Information Impossible Makes Abnormal Profits
Market Efficient
In his work, Fama argued that given the massive use of resources by the brokerage firm to conduct studies on trends in the industry, the effects of changes in interest rates on corporate balance sheets and expectations of managers and/or political analysts of the companies should be able to systematically beat a generic portfolio with the same risk characteristics.
Since, according to Fama, professional in every situation, the analyst has a fifty percent chance of beating the market; although its specific capabilities did not exist he would beat a lot of the market. The analyst did "help" the market to be efficient if all the investors, in fact, would hold portfolios composed of stock indices, would open up significant opportunities for professional traders to take advantage of the situation. But the movement of traders to that "new market" would mean that the advantage disappears, confirming once again, thus the "Efficient Market Theory" of Fame.
The analysis of Fame tended to confirm, then, the "Random Walk Theory" of stock prices already investigated by authors such as Louis Bachelier in 1900, Holbrook Working in 1934, Alfred Cowles in 1937, Clive Granger and Oskar Morgenstern in 1963, and Paul Samuelson in 1965. Added to their fame by a more rigorous statistical approach-mathematical exposition and a major strength: it was a new revolution in finance. Fame makes three different assumptions about market efficiency.
Financial markets: liquidity, arbitrage and speculation
One of the main reasons for the existence of stock markets is the liquidity, understood as the ease with which financial assets are transferred loss of value. (Pagano, M. And A. Roell 1996) Thus, the stock market facilitates the exchange of such assets, as without it would be necessary to incur high financial costs and time for a transaction. Therefore, the stock market reduces these transaction costs in large hand, provides a quick, accurate and free of the real value of assets financial exchange in it. (Zarowin 1990)
Not all assets that are traded in financial markets have the same liquidity, a way to see what assets are more liquid and the least is to compare the difference between the buyer and the average bid price offered by all financial intermediaries. The smaller this difference is more liquid assets, while if it is large will mean that the lack of liquidity makes running a greater risk intermediary because if it buys us take time to get rid of also, during which you can depreciate by the intermediary incurs a loss. (Rouwenhorst 1998)
In financial markets there are a number of operators that seek to acquisition of an asset in a given market to sell it immediately in another market at a higher price. They are known as arbitrageurs because the operation above is referred to arbitration. (Pagano, M. And A. Roell 1996) This operation carries no risk because the asset purchases and sales take place instantaneously. Indeed, the existence of competing arbitrageurs seeking continuously these opportunities to make a profit without risk, say the price of an asset is the same in virtually all financial markets in the that is listed (this is known as the "law of one price"). The small differences observed among these are due to transaction costs that do not cost advantage of them and act as a limit for the completion of arbitration. The transaction costs are highly dependent on the physical differences between the products traded on a market (hence financial markets are much smaller than in the physical commodity markets) and market size (the number financial assets that are traded daily is very large). (Pagano, M. And A. Roell 1996)
For all these reasons, the existence of competition among arbitrageurs is essential for the market to become efficient. In fact, a market where there are no arbitrage opportunities can be said to be efficient. It should be borne in mind that an important factor to promote competition in the markets lies in the homogeneity of the goods exchanged, and since financial assets are very homogeneous so facilitates competition in financial markets and therefore their efficiency. (Thomas 1989)
Unlike the arbitrageur who only owned the asset for an instant, the speculator keeps in his possession for some time in order to benefit from a favorable future variation in price in return for which is at risk. The importance of arbitration over speculation is that, in many cases, Speculators anticipate price changes without perfect information. In line with this, commented that market participants react quickly to events that provide useful information. (Tonks and Webb 1991)
Walk Down Wall Street Stock Valuation from the Sixties through the Nineties Malkiel notes that there were a number of speculative trends from the 1960s to 1990s, and that they all mended up in the same way. Every few years, the stock market has another bubble or speculative mania which soon crashes and levels off, such as overvalued food stocks in the 1980s or the Nifty Fifty blue chips in the 1970s,
Enron could engage in their derivative trading strategy with no fear of government intervention because derivative trading was specifically exempted from government regulation. Due in part to a ruling by the Commodity Futures Trading Commission's (CFTC) chairwoman, Wendy Graham, derivatives remained free of regulatory oversight. Ms. Graham, wife of Texas senator Phil Graham, made this ruling 5 weeks before resigning as chairwoman of the CFTC and joining the Enron Board
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