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[Group Number]

Theory of Market
Efficiency

[Students Name]
[Course]
[Institution]
2021/2022

This work discusses the concept of Market efficiency from
the perspective of the theory proposed by Eugene F.
Fama.

The work is divided into two sections aiming to ensure a
better understanding of the subject:

Agenda

Part I – the theoretical concepts are approached so the
students can have a fundamental understanding of market

efficiency based on this economists analysis.

Part II – Includes an assessment based on Q&A aiming
to make this presentation more interactive. Each question
is followed by a set of applied answers of the notions
which were previously approached.

Introduction (I)
• The extent to which market prices
represent all accessible, relevant
information is referred to as market
efficiency.
• If markets are both competitive and also
efficient, all information has been
included into prices, and there is no
opportunity to "beat" the market since no
cheap or overpriced stocks exist.
(Titan,2015)

Introduction (II)
• According to the EMH, an investor cannot beat the market,
and market oddities must not exist since they will be
arbitraged away instantly.
• For his achievements, Fama was subsequently awarded
the Nobel Prize. Investors who believe this notion are
advocates of passive portfolio administration and purchase
index funds that follow general market performance.
(Titan,2015)

Part I
Concepts and Theories

Who is Eugene F. Fama?
• Eugene Francis Fama is a well-known American economist
who is best recognized for his scientific investigations on
portfolio management, equity derivatives, and the
hypothesis of efficient market.
• Starting with his Ph.D. thesis, Fama is widely regarded as
the founder of the efficient-market theory.
• Fama offered three forms of efficiency:
A) strong-form
B) semi-strong form
C) weak efficiency. ( Beechey et al.,2000)

Long Term Return Discrepancies
• The research on long-term return discrepancies fails to
deter market efficiency.
• Apparent over-reaction to information is approximately as
frequently as under-reaction, and post-event continuance
of pre-event abnormal returns is as common as postevent turnaround, which is consistent with the market
efficiency theory that anomalies are random outcomes.

• Most importantly, most long-term return oddities tend to
dissipate with acceptable modifications in approach,
which is aligned with the efficient market forecast that
apparent oddities might be attributable to methodology.
(Dragota et al.,2019)

Share Prices reaction to
information (I)
• Fama, Fisher, Jensen, and Roll (during 1969) presented
event studies, which provide important data on how share
prices react to information.
• Many researchers concentrated on returns over a short
period of time (a few days) after a clearly dated event.
• Because daily anticipated returns are nearly zero, this
technique has the benefit that the model for future returns
has no impact on inference about abnormal returns.
(Struk,2019)

Efficient Market Categories
• To begin, an efficient market creates categories of occurrences, each of which suggests that prices overreact
to data.
•

In a well-functioning market, however, seeming below reaction will be about as often met as over-reaction.

• Market efficiency is constant if anomalies are divided randomly among under- and over-reaction. We'll find
that a nearly equal split ...