Erasmus university rotterdam

Market efficiency

The degree to which the present price of a security reflects all the information that is known about the assets underlying security is referred to as market efficiency. In an efficient market new information is quickly reflected in the prices. According to Hoyer-Ellefsen (2004) most developed markets exhibit the “weak form” and “semi-strong” forms of market efficiency. These forms state that past prices do not predict future returns, and asset prices adjust quickly to the release of new information. On the other hand, emerging equity markets are viewed as less efficient compared to developed equity markets. Mainly because stocks are less often traded, and less analysts follow the market. As a result new information, such as earnings announcements or dividend changes are not reflected in the prices immediately. Bruner et al. (2003) found evidence for a “weak form” of market efficiency in emerging markets. Using regression analysis on past returns to predict current returns Hoyer-Ellefsen (2004) shows that more than half his sample of emerging markets did not even show the weak form of market efficiency. This was expected given the relatively lower availability of market information and higher corruption. Pereiro (2001) states that efficiency is hampered as a result of a small number of listed companies, and lower market volume and capitalization of the emerging stock markets.