EFFICIENT MARKET HYPOTHESIS.

Fama introduced the theory of efficient market hypothesis. It is merely about information used in the capital market. In money market we trade money instruments and treasury bills. They provide short term sources of fund in the money market. In capital market, we trade money existing shares. If you are not a shareholder of first bank, you don't need the the permission of the bank to trade your shares in the capital market.

The most important thing ti be discussed about under efficient market hypothesis is share price. When the capital market floor become very floppy, it is given a signal that the productive stage and buying power in an economy is falling. The share price at very sensitive to our environment because of precautionary demand of money. The share price has 2 types of information in it:

1. Generally known information.
2. Intrinsic value of the business.

GENERALLY KNOWN INFORMATION.
It is divided into 2, past and present information.

INTRINSIC INFORMATION.
Its an information everybody craving to have but such information is not easily gotten. It is an information of the future whether a company will remain liquid for foreseeable number of years.
Insider information: The person concerned knows every knowledge than an outside about a particular thing.

We have 3 classes of information:

1. Strong market efficiency: the strong form of market efficiency prostrates that the price of a share contains the past, present and intrinsic of information of a firm.

2. Semi strong market efficiency: it is of the position the a share price carries both past and present Information but doesn't carry Intrinsic future information.

3. Weak market efficiency: this form states the security in the share price carries only the past information. It is common in the works most especially in the underdeveloped economy.

BASIC FOUNDATION OF EFFICIENT MARKET HYPOTHESIS.

1. Investor rationality: if the investors are rationale in their investment decisions, the stock prices will adjust rationality to the flow of new information.
   Note: Homogenous market is a market setting where they are just one kind of goods/services sold by everybody in the market, no brand.

2. Independent deviation from rationality: even though all are rationale does not mean we will make the same decision at a given point in time.

3. Effective arbitrage: it share the investors into rational class and amateur class. The rational class are not influenced by your decision. The amateur take any opportunity given to them. Effective arbitrage means the price in the capital market is very dynamic. It is determined by the interface of demand and supply.

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