Author’s Name: Due Date: Q. 4 Are market outcome always Efficient? In this context, briefly discuss Externalities. What kind of Externality is Pollution? Is there any suitable market or non market solutions to this problem?…
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Most positive economists admit the existence of barriers to competition. As such markets are incomplete given the imperfect information relayed to the consumer. Nevertheless, general equilibrium analysis is often utilized to as a theoretical tool to approximate reality. Market efficiency is rather a controversial concept that has attracted strong views, partly in regards to differences about what it really means on one hand, and on the other hand on investor approaches to investing. It is an economic concept that investigates the effects of allocation of scarce resources towards the well-being of the entire participant within a given economy. An efficient market is a market scenario where commodity prices reflect all information available (Fama 383). The degree of efficiency lies in the type if information incorporated into the prices and the speed with which such information are reflective of the market prices (Jensen 96). The question as to whether markets are or are not efficient is central to investment decisions. In a scenario where markets are efficient, commodity price signals provide the best investment appraisal criteria, and the appraisal process itself justifies the market price levels. Under circumstances of inefficient markets, commodities prices deviate from their true values, and the process of investment appraisals utilizes approximate bench marks in obtaining the viability of investment decisions. Valuation under efficient market conditions yields ‘higher’ returns to certain investors, given the capacity to spot mistakes of under-valuing or over-valuing investment decisions (Fama 396). In essence, an efficient market condition is one in which market prices are reflective of true estimates of investment decisions (Jensen 101). Implicitly, and contrary to the popular view, efficiency of markets does not imply that commodities prices prevailing in the market must equal the true value at all time. All that is needed are unbiased commodities prices, that is to say, prices can randomly deviate from their true value. Under these circumstances therefore, no one group of investors should consistently, with certainty, find their investment strategy running in tandem with market prices. As stated above, the definitions of market efficiency are linked up with information available to investors that are subsequently reflected in commodity prices. Strictly speaking, market efficiency assumes perfect information, for the public and private investors, which is then reflected in the market prices. This implies that investors with precise information on the running of the market will be able to beat the market inefficiencies (Fama 402). Given that the specificity which market efficiency is defined, it is extremely unlikely that markets will be efficient to all investors always. However, it is very possible that a given market (for example the New York Stock Exchange) will be efficient with regards to an average investor. The possibilities and the impossibilities also extend to certain markets as well as to different investors. This is because tax rates are different in different markets scenarios, and so are the costs of business transactions, which confer competitive advantages on certain investors relative to others. In essence, no group of investors can consistently utilize a common investment strategy and emerge victorious. There has to be variations with elements of lose to one or two
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According to Fama‘s interpretation of an efficient market is a situation were no individual investor has an advantage over others in predicting excess returns on securities above the existing market price (Jayasuriya, 2008). This claim is based on the premise that at any given time no one will have information over and above what is available to other players.
This term can be used in various situations in everyday context. When used in the context of internet, it gives a slightly different perspective or meaning. The term “Web presence” is used to denote both website as well as the web servers. When one talks about presence in the web, it denotes the website and when one focuses on physical presence, it is the web servers.
There is notion that competitive market has the ability to achieve the efficient resource allocation automatically, market efficiency depends on the process that will eliminate excess supply or excess demand. Productive efficiency is given by the equality between price and average total cost.
therefore according to the efficiency market hypothesis, there is no investor who has any form of advantage in foretelling the expected return on the security prices since there is no investor who has access to the public information or private information that is not yet available to any other investor.
Efficient structure hypothesis ESH
This is a hypothesis that postulates that the interlinking between the market structure and performance of any firm is defined by the efficiency of the firm. For instance, the firms that have superior management or production technologies possess low cost and this implies high profits.
Information that is contained in the stock market data is considered by a few to be able to guide investors and analysts about the future course the stock markets might take in terms of predicting equity prices and returns. A lot of technical analysis is based upon this belief.
The movement of the stock prices is largely determined by the relative merits and demerits of the information and how it is going to affect the performance of the company which the stocks represent. Just the same way the predictability of the information is impossible as to whether it is good or bad, it is equally impossible to predict the direction in which the stock prices will move in the future based on such information.
The price momentum may be an outcome associated with the failure to understand and incorporate the forecasted trends of shock-earnings into pricing. This also derives from the fact that the profits, mainly, associated with a stock are from the capital gains aspect, rather than dividends, which is why the term 'price' and 'momentum' are used simultaneously.
Thus if any investor desires to earn higher returns he has to buy much riskier shares or bonds. When stocks rose by high percentages the analysts said that it was due to the efficacy of stock markets and therefore the positive rally reflected the true performance of the companies.
By producing the goods that meet the requirements of people and making them available at the right price. Indeed, market efficiency is greatly impacted by bureaucratic measures and control on the market paradigms like price, resources and allocation competency vis-à-vis
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