Essay on Market Efficiency Cambodian Economist Journal, Vol.1, Issue.001 LONG KimKhorn, PUC, MA.

IRs, ID: 61283 January 18 2013 What is market efficiency? Undoubtedly, market efficiency is a concept that is controversial and attracts strong views, pro and con, partly because of differences between individuals about what it really means, and partly because it is a core belief that in large part determines how an investor approaches investing. For instance,if markets are, in fact, efficient, the market price provides the best estimate of value, and the process of valuation becomes one of justifying the market price. In contrast, if markets are not efficient, the market price may deviate from the true value, and the process of valuation is directed towards obtaining a reasonable estimate of this value. According to Robert Jarrow&Martin Larsson, 2011, stated that A market in which prices always fully reect available information is called ecient.There are three sets of information have been considered when discussing how markets can be efficient: (i) Historical prices (weak form eciency), (ii) publicly available information (semi-strong efficiency), and (iii) private information (strong form eciency). A market may or may not be ecient with respect to each of these information sets. Thus, market eciency per se is not testable. It must be tested jointly with some model of equilibrium, an asset pricing model. Beside what have been mentioned above, the concept of efficiency is considered to be central of finance. Primarily, the term efficiency is used to describe a market in which relevant information is impounded into the price of financial assets. Sometimes, however, economists use this word to refer to operational efficiency, emphasizing the way resources are employed to facilitate the operation of the market. There are some notions were made such as - if capital markets are sufficiently competitive, then simple microeconomics indicates that investors cannot expect to achieve superior profits from their investment strategies. If markets were, in fact, efficient, investors would stop looking for inefficiencies, which would lead to markets becoming inefficient again. It makes sense to think about an efficient market as a self-correcting mechanism, where inefficiencies appear at regular intervals but disappear almost instantaneously as investors find them and trade on them.

The concept of market efficiency had been anticipated at the beginning of the century in the dissertation submitted by Bachelier (1900) to the Sorbonne for his PhD in mathematics. In his opening paragraph, Bachelier recognized that "past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes".As for Elroy Dimson and MassoudMussavian, 1998, mentioned that "if the market, in effect, does not predict its fluctuations, it does assess them as being more or less likely, and this likelihood can be evaluated mathematically". How does it relate to corporate financing? Well, as what we have understood, Corporate finance is the area of finance dealing with monetary decisions that business enterprises make and it is the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximizeshareholder value. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. So in order to maximize the investment value of the shareholders, a market has to be efficient to guarantee the expected returns. Explanations of Treynor would be the best, he provided arguments why investors as a whole lose from trading, and why informed investors win. The key is to understand the role of the dealer or market-maker, who loses when trading with informed investors, but aims to more than recoup these losses through trading with uninformed investors. The efficient markets hypothesis is simple in principle, but remains elusive. Evolving from an initially puzzling set of observations about the random character of security prices, it became the dominant paradigm in finance during the 1970s. Samuelson (1965), whos Proof That Properly Anticipated Prices Fluctuate Randomly, began with the observation that "in competitive markets there is a buyer for every seller. If one could be sure that a price would rise, it would have already risen." Samuelson asserted that "arguments like this are used to deduce that competitive prices must display price changes... that perform a random walk with no predictable bias."So come up with a better understanding of price formation in competitive markets, the random walk model came to be seen as a set of observations that can be consistent with the efficient markets hypothesis and a better understanding of price formation are the core value and opportunity cost for corporate investors to trade financially at maximum-benefit price rate.