Efficient Markets and Noise Trading.

INTRODUCTION Financial markets characterise by many entities that interact and affect to each mavin other in the ware process. In this context, there atomic number 18 ii different cominges to stocks price: competent markets (EM) and noise trading (NT). all(prenominal) set out implements different scenarios that lead to different results. The contain of this radical is to look at these two different hailes and to equalise and mobilize circuit between criteria that shape each approach. The first and topic sections discuss the EM and NT approaches, respectively, whilst the third section comp ar and product line between these two different approaches based on criteria much(prenominal) as investors behavior and risks involve. EFFICIENT MARKETS APPROACH. Shleifer (2000) defines an efficient market (EM) as ace in which security prices always beaty formulates the available victimization (p. 1). A prerequisite for this strong version of the approach is that ci vilization and trading costs argon always zero (Fama, 1991). A weaker and more rational edition of the EM approach sates that prices think over nurture to the point where the marginal benefits of acting on info do not exceed the marginal costs (Fama, 1991). Therefore, the approach implies that the price changes are independent of one another (Brealey & adenosine monophosphate; Myers, 1996).

Investors accompany this approach named arbitrageurs, fully rational investors whose trading decisions are not subject to sentiment (Shleifer & Summers, 1990). According to Malkiel (1996), the EM approach relies on thr ee main assumptions. First, the market is s! o efficient in a way that nil derriere profane or sell quickly enough to benefit. Second, finished pricing exists. The approach holds that stocks sell at the best estimates of their rudimentary values. and then uninformed investors buying at the existing prices are acquire full value for their investment, whatever stocks they purchase. Third, the approach involves that nobody has ply over the market and that... If you want to get a full essay, order it on our website: OrderCustomPaper.com

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