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Efficient markets theory is a field of economics which seeks to explain the workings of capital markets such as the stock market. According to University of Chicago economist Eugene Fama, the price of a stock reflects a balanced rational assessment of its true underlying value (i.e., rational expectations); its price will have fully and accurately discounted (taken account of) all available information (news). Economics (deriving from the Greek words οίκω [oeko], house, and νέμω [nemo], distribute) is the social science that studies the allocation of scarce resources through measurable variables. ...
The capital market is the market for long-term loans and equity capital. ...
The University of Chicago is a private co-educational university located in Chicago, Illinois. ...
Eugene F. Fama (born February 14, 1939) is an American economist particularly known for his work on portfolio theory and asset pricing, both theoretical and empirical. ...
Rational expectations is a theory in economics used to model the determination of expectations of future events by economic actors, originally proposed by John F. Muth (1961). ...
The theory assumes several things including (1) perfect information, (2) instantaneous receipt of news, and (3) a marketplace with many small participants (rather than one or more large ones with the power to influence prices). The theory also assumes that (4) news arises randomly in the future (otherwise the non-randomness would be analysed,forecast and incorporated within prices already). The theory predicts that the movements of stock prices will approximate stochastic processes, and that technical analysis and statistical forecasting will most likely be fruitless. Perfect information is a term used in economics and game theory to describe a state of complete knowledge that is available to all market participants, or players, and that is instantaneously updated as new information arises. ...
In the mathematics of probability, a stochastic process can be thought of as a random function. ...
This efficient process of price determination can be contrasted with an inefficient market in which, according to the theory, the pre-conditions for efficient pricing (perfect information, many small market participants) have not been met and prices may be determined by factors such as insider trading, institutional buying power, mis-information, panic and stock market bubbles and other collective cognitive or emotional behavioral biases. Perfect information is a term used in economics and game theory to describe a state of complete knowledge that is available to all market participants, or players, and that is instantaneously updated as new information arises. ...
There are two kinds of trading that are referred to as insider trading: Trading of a security of a company (, shares or options) based on material nonpublic information. ...
A stock market bubble is a type of economic bubble in which an exaggerated bull market where the value of stocks listed on a stock exchange rise dramatically upon a wave of public enthusiasm. ...
A central part of this theory is the Efficient market hypothesis. In finance, the efficient market hypothesis (EMH) asserts that stock prices are determined by a discounting process such that they equal the discounted value (present value) of expected future cash flows. ...
See also
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