Lecture 1- Capital market & its efficiency

Efficient market is [blank_start]market[blank_end] that [blank_start]fully[blank_end], [blank_start]immediately[blank_end] & [blank_start]rationally[blank_end] reflects all [blank_start]available information[blank_end] in the [blank_start]share price[blank_end]

One foundation of market efficiency is [blank_start]rationality[blank_end] (assumes all [blank_start]investors[blank_end] are [blank_start]rational[blank_end] & therefore, when [blank_start]new information[blank_end] is released in [blank_start]market[blank_end], they will [blank_start]adjust[blank_end] their estimates of [blank_start]share price[blank_end] in [blank_start]rational[blank_end] way

Another foundation of market efficiency is [blank_start]independent deviations[blank_end] from [blank_start]rationality[blank_end] (accepts some [blank_start]investors[blank_end] do not act fully [blank_start]rationally[blank_end] however, supposes there is [blank_start]balance[blank_end]. Irrationalities will cancel out each other & therefore [blank_start]market[blank_end] will be [blank_start]efficient[blank_end]

Third foundation of market efficiency is [blank_start]arbitrage[blank_end] ([blank_start]combined[blank_end] actions of many [blank_start]investors[blank_end] engaging in [blank_start]arbitrage[blank_end] result in price being [blank_start]pushed up[blank_end] towards equilibrium level which [blank_start]eliminates arbitrage[blank_end] opportunities so market is efficient)

One type of market efficiency is [blank_start]weak form[blank_end] ([blank_start]past price[blank_end] behaviour is [blank_start]reflected[blank_end] in [blank_start]current share prices[blank_end])

Another type of market efficiency is [blank_start]semi-strong form[blank_end] ([blank_start]all public information[blank_end] is reflected in [blank_start]current share prices[blank_end])

Third type of market efficiency is [blank_start]strong form[blank_end] ([blank_start]all information[blank_end] is reflected in [blank_start]current share prices[blank_end])

Random walk theory says [blank_start]security prices[blank_end] change [blank_start]randomly[blank_end], with no [blank_start]predictable trends[blank_end] or [blank_start]patterns[blank_end]

Technical analysis is method of identifying [blank_start]undervalued stocks[blank_end] by searching for [blank_start]patterns[blank_end] in [blank_start]past stock prices[blank_end] & predicting what the stock prices could be in [blank_start]future[blank_end]

Fundamental analysis is method of identifying [blank_start]mis-priced securities[blank_end] by analysing [blank_start]fundamental information[blank_end] such as accounting data, business prospects & [blank_start]external events[blank_end]

Test for weak form of market efficiency is [blank_start]serial correlations[blank_end] ([blank_start]correlation[blank_end] between [blank_start]current return[blank_end] on security & [blank_start]return[blank_end] on [blank_start]same[blank_end] security over [blank_start]later period[blank_end])

Test for semi-strong form of market efficiency is [blank_start]event studies[blank_end]