英语论文网

#8224;M, it is instantaneously reflected on market prices.

The concept of market efficiency was first introduced by Bachelier (1900). Since then, there has been many studies like Working (1934), Cowles and Jones (1937), Kendall (1953), Cootner (1964). However it was Fama (1965) who first used termed it as a€œefficient marketa€. Fama (1970) later stated the sufficient but not necessary conditions for efficiency:

i. there are no transaction costs in trading securities;

ii. all available information is costlessly available to all market participants, and

iii. all agree on the implications of current information for the current price and distributions of future prices of each security

He also identified three degrees of informational efficiency namely the weak form, the semi-strong form and the strong form.

2.2 Random Walk Model (RWM)
The Random Walk Model is a close counterpart of the Efficient Market Hypothesis. The model was originally examined by Kendall (1953). It states that stock price fluctuations are independent of each other and have the same probability distribution. Thus the Random Walk theory suggests that stock price change randomly, making it impossible to predict stock prices. The Random Walk Model is linked to the belief that markets are efficient and that investors cannot beat or predict the market because stock prices reflect all available information and the new information arises randomly. As mentioned in Fama (1970) the two hypotheses constituting the Random Walk Model , that is (i) successive price changes are independent and (ii) successive changes are identically distributed, are implicitly assumed in the Efficient Market Hypothesis.

The Random Walk Model is in direct opposition to technical analysis, which suggests that a stock's future price can be forecasted based on historical information through observing chart patterns and technical indicators.

2.3 3 Forms of Market Efficiency
2.3.1 Weak-Form Efficiency
Fama (1970) stipulates that no investor can earn excess returns by formulating trading strategies based on historical price or return information in a weak-form efficient market. The weak-form efficiency thus assumes that the price of a stock fully reflects all information contained in past prices, that is the historical sequence of prices, rate of returns and other historical market information. A weak-form efficient market implies that it is of no use to engage in technical analysis that use past prices alone to find undervalued stocks.

In order to test whether past share prices can be used to predict future share prices( that is, weak-form efficiency), statistical or econometric tests can be used. These studies seek to study the evolution of share prices from one period to the next period and try to detect correlation between the successive price changes. Technical analysts study the evolution of past share prices, with the aim of predicting share prices to make gains.

2.3.2 Semi-Strong Form Efficiency
Fama (1970) described the semi-strong form efficiency as one where share price fully reflect all information contained not only in past prices but all public information. All public information includes capital market information as used in the weak form Efficient Market Hypothesis(EMH) as well as non-market information such