Efficient capital markets and behavioural fincance

8 important questions on Efficient capital markets and behavioural fincance

How to make money through capital raising

1. Investors lack understanding of risk and valuation of complex securities (so they'll make more money)
2. Firms may reduce costs or obtain subsidies
3. Firms create new securities

Efficient market hypothesis emh

1. Information is immediately reflected in prices
2. Firms should expect to receive fair value for securities they sell

Conditions that'll cause market efficiency

1. Rationality
2. Independent deviations from rationality
3. Arbitrage
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Independent deviations from rationality

With irrationality, market will function efficiently if optimistic / pessimistic irrational investors are same number

Weak form efficiency

Capital market will satisfy when fully incorporates information on past share prices.

Semi- strong efficiency

Firm reporting increased earnings, investors would buy more shares. Information on increased earnings would immediately reflect in current share prices.

Strong form efficiency

Have incorporated information not only available information, also privately held information. Believers say that secrets come out as market recognises investors trading based on secret information

Weak form efficiency implies that

Security's price movement in past is unrelated to price movement in future.

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