The implications of efficient markets to investment managers and analysts are important because they affect the value of securities and how these securities are managed. Several implications can be drawn from the evidence on efficient markets for developed markets:
- Securities markets are weak-form efficient, and therefore, investors cannot earn abnormal returns by trading on the basis of past trends in price.
- Securities markets are semi-strong efficient, and therefore, analysts who collect and analyse information must consider whether that information is already reflected in security prices and how any new information affects a security’s value.
- Securities markets are not strong-form efficient because securities laws are intended to prevent exploitation of private information.
Fundamental Analysis
Fundamental analysis is the examiniation of publicly available information and the formulaiton of forecasts to estimatethe intrinsicvalue of assets.
Fundamental analysis involves the estimation of an asset’s value using company data, such as earnings and sales forecasts, and risk estimates as well as industry and economic data, such as economic growth, inflation, and interest rates. Buy and sell decisions depend on whether the current market price is less than or greater than the estimated intrinsic value.
Technical Analysis
Investors using technical analysis attempt to profit by looking at patterns of prices and trading volumn.
Although some price patterns persist, exploiting these patterns may be too costly and, hence, would not produce abnormal returns.
Portfolio Management
If securities markets are weak-form and semi-strong-form efficient, the implication is that active trading, whether attempting to exploit price patterns or public information, is not likely to generate abnormal returns. In other words, portfolio managers cannot beat the market on a consistent basis, so therefore, passive portfolio management should outperform active portfolio management.
