Create a 10 page essay paper that discusses Market Efficiency.Download file to see previous pages... Also, the cash flow shocks, if embedded within the pricing, the price momentum can be observed. Or

Create a 10 page essay paper that discusses Market Efficiency.

Also, the cash flow shocks, if embedded within the pricing, the price momentum can be observed. Or in a generalized manner, embedding any shock in the stock pricing implies the presence of price momentum.

Shivakumar (2006) agrees that this phenomenon does seem contrary to the efficiency market hypothesis, whereby, the hypothesis state that information is readily and equally available to all investors to ensure that the decision making of each is the differential amongst their strategy, because strategy is derived from information on which a decision is made. This concept is also agreed upon by Subrahmanyam (1998), Fama (1998) and Martin (2003) during their analytics on this model. Along the similar lines, if information available to everyone is the same, then there is consistency of information availability in the market. Thus, a competitive environment shall prevail. However, this phenomenon exists in idealistic situations only, and on a general note, factors such as insider-trading, using privileged information and so on do exist in markets globally. Subsequently, there are shockers - shocking news in the market - that prevail and the price of a stock fluctuates according to these shocks that can either be negative or positive. the former slides stock prices down, and the later carries it up, and the force that takes it up or down is known as the 'price momentum'.

Additionally, if the assumption of efficient market hypothesis would prevail, then equal information shall be available to all, and there would be presence of 'shock absorbers', because since an information would not just be available for certain individuals but for everyone, therefore, there would be not much of a shock for people to know about the case.

MacKinlay (1990) states an example that assume a case where the CEO of a firm died over night, and was mainly responsible for the expansion and a lot of great job that he did and now the firm lacked leadership. In case of an efficient market, everyone would know this, and therefore, there wont be a rush to sell off the shares because there wont be anyone to buy them as the firm would be in trouble, other than the opportunist. So a sensible investor would retain the shares and let the market float, till some positive news comes and then shares can be sold. In case the market is not efficient, this news would be restricted to few individuals who would sell off their shares as soon as they can and let other investors sink as the news wont have been public by then, and this quick-sell from certain investors and then the shock would eventually lead towards the sliding price momentum.

Theoretically, as stated by Titman (1993), in case of efficient financial markets, there won't be an excess profit margin for investors, thus illustrating that price momentum is a compensation for bearing the risk associated with the awareness or unawareness of investors.