Real world financial markets such as the NYSE or the foreign exchange (foreign currency) markets are assumed to be "efficient" in their structure and operation. Indeed if they are not (or not approximately efficient) much of contemporary financial theory would not apply to them. What is an efficient market, why are they important and what are the various forms of market efficiency? Please provide examples of each.
Please support answer with a minimum of three quality academic and/or industry references. Ex: Examples of acceptable references include:
The Financial Times
The Wall Street Journal
The Journal of Finance
Harvard Business Review
Examples of unacceptable references include:
Efficient Financial Markets:
Market efficiency is championed by the efficient market theory. Through this market structure, the prices that are in the business environment fully reflect on the information that is held on a particular stock. This eradicates the benefit of other investors having the ability of predicting the returns that will be obtained from the stock. By virtue that an efficient market is a market structure where the market prices adjust rapidly to the new information, significant information is availed to all the organizations in the market at the same time (What, 2009).
Importance of Efficient Markets:
There are a lot of advantages that can be derived from the efficient market structure. The fact that the nature of information is not limited to specific business entities and individuals means that equal opportunity in the business market will be attained. This will propel the operations of the business organizations by virtue that the information in the business environment will be reflected in the stock price (Cohen, ...
The solution discusses what is an efficient financial market and why they are important.