INFORMATIONAL INEFFICIENCY OF STOCK PRICES

Abstract

Do the stock prices normally reflect fundamental value of the underlying stocks? Within the framework of Efficient-Markets Hypothesis (EMH), prices embody all relevant information effectively in the stock market. In this case, prices provide perfect information and so changes in stock prices will be attributed to new information. Although much studies have focused on the informativeness of stock prices, asset price changes are often not accompanied by any arrival of external news or information. This contradicts the EMH view and so this paper aims to explain this phenomena. In addition, this paper attempts to explain how the heterogeneity of traders, different trading horizons and different attitudes towards risk can affect prices. With the existence of informational inefficiency in the stock prices, there exists a possibility of price manipulation. Since the operation of stock market is vital to the health of the economy, it is important that one pays more attention to this area of research.