The efficient-market theory is a very intriguing hypothesis in technical economics, which states that asset values reflect all relevant economic information. Another implication is that since market prices are merely responses to new information, it is essentially impossible to “beat the market cap” on a constant risk-adjusted basis as market prices would only respond to recent information. This article examines the importance of the efficient-market theory in a global context. We shall look into topics such as the size and liquidity of global markets, the role of central banks, and the role of efficient pricing in the economy.
One major issue in discussing what is efficient is the concept of efficient pricing itself. Simply put, efficient pricing is defined as a pricing strategy that maximizes the true value of an asset. The true value of an asset is the value of the net present value of all future cash inflows less any exogenous factors which may depreciate the value of the asset over time. This means that if a firm wishes to sell its asset and realize a profit, it should be able to sell at or just below the prevailing market price. It is widely believed that firms with the best knowledge of their own industry and market structure tend to maximize the true value of their assets.
Efficiency in a market refers to the ability of the market participant to get the most out of his investments. Efficiency in a market also refers to the extent to which market participants are able to use information available to make investment decisions. In other words, efficient market implies efficient allocation of resources between different participants in the market. Information available to market participants allows them to make informed decisions and meet their objectives.
Efficiency in a market also refers to the extent to which trading decisions are made based on accurate information available to all market participants. Information available to market participants enables them to make informed decisions. It also enables them to exercise discipline in trading, making them unlikely to act on unsound speculation. This facilitates efficient market because each participant is able to meet his or her trading needs at the best price possible. The end result is that each trader is able to maximize his or her profit and share.
However, efficient market does not mean that every transaction is successful. Prices can still be affected by factors outside of the control of the individuals buying and selling the assets. One example of a factor that may affect asset price movements is the political atmosphere. An unstable political environment may affect foreign investors and therefore foreign currency interest rates. Political instability may cause turbulence in financial markets. If an investor is fearful of losing his or her money, he or she may be reluctant to lend or buy assets.
Speculative economic bubbles in the stock market do not affect the efficiency of the market. Assets can be purchased at any time and sold at any time. Therefore, the efficiency of the stock market depends solely on individual investment decisions. Individual investors may purchase shares of an undervalued company and sell them for higher prices; they may buy shares of an overvalued company and sell them for lower prices. In either case, the effect on the stock’s price is both immediate and short-term. This is unlike, say, the operation of the refrigerator in your home, in which the effects of changes in temperature are long-term and have longer-term implications on the operation of your refrigerator.
One example of how the efficient market hypothesis affects the functioning of the economy is during periods where investors expect market trends to change dramatically. For instance, if a central bank is considering a large-scale change in interest rates, investors may react aggressively to this change. As a result, changes in the rate may reduce the value of real estate, consumer goods, and other long-run assets. In contrast, if investors expect no change in the rate, they may do little to affect the value of short-term assets such as equities and short-term loans. The short-term effects of this theory are the unexpected increase in stock prices from unexpected increases in supply and demand. The economic ramifications from this are not immediately felt by the broad population of investors, but they do affect the broader economy in ways that were not thought possible.
Changes in the stock market efficiency, however, may also be accompanied by changes in the behavior of investors. If, for instance, an investor decides to purchase stock that has been given to him at a discount, then the effect on the market efficiency may be counter-intuitive. In this situation, the supply becomes greater than demand, and the value of the asset decreases. However, this situation also gives the investor the opportunity to purchase shares of stock for less than he paid. Thus, it can sometimes be beneficial to invest in a company that is undervalued in the hope that its stock price will increase over time.