Characteristics of an Efficient Market, Essay Example

The Efficient Market hypothesis was developed in the 1960s and marked the new stage in the evolution of the financial markets theory. The Efficient Market Hypothesis claims that at any given moment, security prices will reflect all information available to investors (Higgins, 2009). Put simply, in a financial market with well-informed participants, all securities will have appropriate prices, which reflect all information available in the market. The principal features of an efficient market include:

• Any new information immediately leads to the changes in prices;
• Security prices change at random;
• The availability of information makes it impossible to develop the best trading strategy;
• The quality of the investors’ performance depends on chance and is never the result of various systemic factors, e.g.the failure to find, access, and use available information (Higgins, 2009).

These are the most common features of any efficient market, but the Efficient Market Hypothesis further differentiates between weak, semistrong, and strong markets. Weak efficient markets reflect all past information, prices, and data, and make any technical analysis useless (Higgins, 2009). In semistrong markets, security prices reflect all publicly available information; consequentially, no fundamental analysis is necessary (Higgins, 2009). Finally, strong efficient markets exemplify the openness of all available information, which reflects in security prices; as result, insider information cannot affect the financial market stability and induce changes in security pricing (Higgins, 2009). The Efficient Market Hypothesis has far-reaching practical implications for the financial market efficiency,both in theory and practice. The characteristics of an efficient market can serve reliable criteria in the evaluation of the global financial efficiency.

References

Higgins, R.C. (2009). Analysis for financial management. Richard D. Irwin.