Coventry University 250FIN: Financial Market Efficiency Essay

This essay critically examines the concept of financial market efficiency, focusing on the seminal work of Fama and its impact on capital markets. It delves into the core principles of efficient markets, exploring how information dissemination and trading dynamics influence asset pricing. The essay analyzes the roles of the Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) in understanding and predicting market behavior. It discusses the importance of financial markets in fostering economic growth by providing investment sources and promoting long-term investments. The paper also touches upon the classification of financial markets into primary and secondary markets, highlighting their functions and contributions to socio-economic development. The essay concludes by summarizing the key findings related to market efficiency, the role of rational and irrational investors, and the implications for investment strategies. It also covers the importance of financial projects and the impact on the economy.

Running Head: FINANCIAL MARKET
FINANCIAL MARKET
Name of the Student
Name of the University
Author Note

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Introduction
The paper will focus on the role of Fama in the development of efficient financial
markets. They mainly focused on contributing towards the capital markets. The paper has
discussed on how efficient was the financial markets during the seminal work of Fama in the
year 1970. The main objective of this paper is to analyse the efficiency of financial market.
Discussion
Financial market is a place where there is participation between buyers and sellers for
the trade of assets in a market place. Assets includes trades, bonds etc. With reference to the
seminal work of Fama (1970), financial market has shown its efficiency. The participation of
trade ensures that the information of the asset is reflected properly in the market place.
Financial markets are efficient by not allowing the investors to earn them more above than
they had invested. It is efficient in providing information regarding the profit of the company
through forecasting model with help of technology. The model shows actual relation between
the profits earned in the financial year with respect to the profit of the previous year and helps
to analysis in a better way, so that the profit is developed better for the coming years (Du-
Pisanie, 2019). In the seminal work the most debated concept was focussed and discussed
that financial market would be most importantly efficient for Arbitrage pricing theory (APT)
and another factor is for Capital asset pricing model (CAPM). The capital asset pricing model
accepts and take a review on the securities and protects its risk on pricing of the securities
and it also accepts the return assets and analysis the security exchange (Yeap & Gan, 2017).
Arbitrage pricing theory is a technique that enable to predict the model of the CAPM and the
pricing of the securities for the year in the financial marketing system and helps to prevent
from the information and revelation of data related to the price of the securities in a capital
market system involved during the trading between the buyer and seller in the system. The
financial market had provided a great significance in increasing the economy of the nation

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and the organisation, this is done by providing investment source for the economy (Gurrib,
2018). Investment sources such as gold or other kind of government securities which in
future can be repaid back (Vidal-Tomas & Alfarano, 2019). The investors use money in such
a way that there is no loss in the money for maximum profit in the business. Investing in a
Financial marketing system protect from any kind of loss rather than other kind of marketing
system since its sources it uses a limited resources and trading using the financial sources
(Katz, McCubbins & McMullin, 2018). This helps making the economy stable in a nation.
Financial market had been constantly providing funds for long term investment and thus
promoting the growth of economy consistently. Long term investment provides the
information regarding the sources the company has taken for investing. This is the assets side
account of the company’s investment which the company can hold more than 1 year. The
long term assets are not even sold sometimes which is benefit .Hence financial marketing is
better way and efficient in the marketing system. The financial market had played important
role for a company by ensuring improving productive assets and thus sustaining its
growth ,which are investments of the company earned internally with surplus money ,which
is the extra earned and improves the economy of the business (Marcu, Dobrota &
ANTONEAC, 2017). It has given various options for the government and ideas to bring
forward various financial projects. Financial projects. Financial projects helps in determine
the loan structure of the company which helps further in analysing the cash flow and
explaining the idea how this would be planned for smooth run of the finance within boundary
(Bai, Philippon & Savov, 2016). This would attract major fund projects as well more.
Financial projects helps in financial management and provides a list of ideas based on
accounting. An effective financial market had helped in bringing more foreign investors thus
helps in broaden its capital formation and broadcasting of the company (Zhu, 2017).
Financial market includes capital market which reduces loan financing where a company

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doesn’t need to promise to repay the loan, which in turn helps the company for long
gestation. Capital market includes long term debt in from of securities. These securities are
bought and sold in a capital market system. It provides a channel for the agents of long term
investments. It has helped in socio economic development by increasing the number of
finance projects (Nikkinen & Peltomäki, 2019). The financial market is classified to primary
and secondary market system. Primary market attracts the long term capital by issuing
securities and is transferred to the secondary market for shareholders liquidity (Corgnet,
DeSantis & Porter, 2020). The liquidity helps in increasing the financial instruments by
reducing the risk premium. The secondary market provides a meeting place for various
investors which includes retail investors as well and helps in improving the socio economic
of the country.it helps in investing capital and price for nation. A capital market provides
important and all information on the price of the security such as stock exchange or
commodity exchange without affecting the information of the price or capital of the particular
company even after disclosing the information openly to all the participants. According to
seminar work Fama, he has explained that the trading of securities through financial market
would not include any trading cost and the buyers would sell the securities at a cheaper price
to the agents. By seeking towards the current price there will no objection of the agents if
there is any increase in price of the securities in future (Bai, Philippon & Savov, 2016).
Financial market provides relevant information by providing the current price of which shows
all the information of the security. The capital market provides the information of the past
price of the security. The current market price of the security gives the information publicly
to agents. The information includes the economic factor of the company and the important
announcements taken for the nation, the financial statements are also announced publicly
which helps in making aware to every important agents about the capital structure of the
company thus revelling the security information in a current market. Though the financial

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market doesn’t increase the profit always high and add its value, still sophisticated traders
had helped this. The information process of the financial market is dependent and the stock
market is taken as independence assumption. Financial market helps in determining the asset
prices in the competitive market. It helps in giving the investors about the information of their
incentives and analyse a detailed information about it. Financial market is better than mutual
funds. In market the securities such as stocks provide an annual tax return quarterly or half
yearly and profit is made after selling of the securities. In mutual funds profit is calculated
after the end of a business day. The seminar report explained about the advantage of financial
market few years back. The financial market can work properly without any fail through time
varying premier. It helps in bringing the economy to a better part. The rational investors
update their information and the irrational investors cancel their trade without harming the
price of the economy. The rational investors also try to remove or find any error in the price
of the irrational investors (Callado & Leitao, 2018). The buyers or sellers in the financial
market here logical decisions that helps in improving their interest towards the work and
agents are also satisfied with it. During buying and selling there is a lot of profit difference
noticed, so in order to solve this arbitrage is a riskless profit is earned during trading between
the buyer and seller in a financial market. This riskless profit overcomes the profit
differences. With reference to Flama seminar report, the main role of the financial market is
to look ad guide the capital stock of the economy of nation. Financial market helps in
understanding how capital market works in an economy. In an efficient market system the
funds or prices shows how assets are allocated for the development and gives a brief about
asset allocation (Çelik & Koy, 2019). Working in a financial market helps in taking own
decisions and takes care independently without any government rules that can bring
inefficiency in the work rather than an efficient work. In an efficient financial market system
the securities exchanged involves in financial policy. The information of the price of previous

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year is also reflected in the current year, thus technology is no longer useful. Financial market
helps in providing the structure of the developed markets and increase the efficiency. In a
financial market system the optimal forecast return is similar and considered as one with the
current equilibrium return. It provides in increasing the power of the statistical tests used. The
financial market has dominated the economics of the past years and also helps in increasing
the finance comparing to the finance of the past few decades. Financial market system has
helped in the growing competitive world where economy of a system matters (Marcu,
Dobrota & ANTONEAC, 2017). It has efficiently helped to manage in the modern world
since it uses the technological assessment. In the seminar report financial market is supported
and the statistical prediction that was usually done is no more predicted. Some psychological
parameters are used in financial market and shows the reality of the financial market. In the
system the investors use strategies using the latest technologies to make in the competitive
nation, this is achieved by searching and learning new strategies to achieve the idea. Financial
market is an institution where there is no robust (Angelini & De Angelis, 2019). It is least
risky for any kind of proxies during a profit calculation or providing a source. Financial
market system has implications on allowing others to build in the market which is the main
foundation towards finance marketing.
Conclusion
Therefore, it can be concluded financial markets like capital market has been efficient
during the seminar work of Fama 1970. They focused on the trading rules such that the stocks
will be buyed only when its price falls on the stock market. The information process of the
financial market is dependent and the stock market is taken as independence assumption. The
financial market had provided a great significance in increasing the economy of the nation
and the organisation, this is done by providing investment source for the economy. The
investors use money in such a way that there is no loss in the money for maximum profit in

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the business. A capital market provides important and all information on the price of the
security such as stock exchange or commodity exchange without affecting the information of
the price or capital of the particular company even after disclosing the information openly to
all the participants. In the seminal work the most debated concept was focussed and discussed
that financial market would be most importantly efficient for Arbitrage pricing theory (APT)
and another factor is for Capital asset pricing model (CAPM). CAPM model accepts and take
a review on the securities and protects its risk on pricing of the securities and it also accepts
the return assets and analysis the security exchange. APA model enable CAPM to predict and
the pricing of the securities for the year in the financial marketing system and helps to
prevent information and data related to the price of the securities in a capital market system
involved during the trading between the buyer and seller in the system. Hence, financial
market is risky.

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