Are equity markets efficient - Assignment Example

Therefore, the allocatively efficiency is determined by utilising a very complicated economic model2. Financial literatures have also eluded that, apart from other factors in global and local market, operational and informational efficiency have a very essential role in shaping market allocative efficiency. For instance, if some investors have realised that some dominant investors in the market have essential information on the market trend, then the possibility of demanding a higher rate of returns on asset is relatively high.

The liquidity in assert prices have a considerable role in shaping allocative efficiency. Based on the available information, it is factual to state that the existing microstructures finance does not provide specific question on the nature and profitability in the market. Consequently, equity markets are in most cases inefficient. Moreover, the level of market efficiency depends on the degree of operational and information efficiency. The allocation of funds in any project depends on the available information regarding the productivity and worth of the project or investment.

Very few investors develop interest to invest on projects that have limited rewards on their investments. Moreover, dominant investors in modern market control and manage operation and productivity of specific market. The dominance of market by prominent investors, therefore, increases the rate of inequity in modern market. Moreover, in an inequitable market, most decision make formulated and implemented by individuals who have personal interest in the market3. Operational efficiency Operational efficiency is the evaluation of cost incurred in the transfer of funds from savers to investors.

Therefore, operational efficiency is used to define the entire transaction cost in financial sector. In an ideal market, the transaction cost in the market should reflect the marginal cost of offering services to market participants4. Moreover, the management and execution of operational efficiency is in most cases based on the liquidity of a specific market. However, modern market has proved to be inefficient due inefficient mechanisms that can necessitate investors to transact their business in a reasonable size without paying huge transaction cost.

Searchers and financial theorists have as well claimed that sophisticated investors and entrepreneurs invest in markets with many liquidity-based investors in order to hide their trades. This, therefore, means that the level of informational efficiency is associated with the level of operational efficiency. The amount of information available regarding to the prices in the market determines the level of liquidity in the market. The association of the amount of resources in the market with liquidity level in the market explain the level of inequity in modern market efficient5.

Informational efficiency The assert market is presumed to be informational efficient if the prices of asset have totally incorporated the required information on fundamental values. The efficient of the markets is, therefore, defined by the price information that is available to market participants. However, the market informational efficient is to some extent weakened by inclusion of past prices in current prices. The incorporation of past prices in new prices rules out the employment of technical trading rules and regulations in making excess return6.

A market is in “semi-strong form of efficient”