All students who study futures or stock markets seriously must understand the implications of the efficient markets hypothesis and decide for themselves to accept or reject its conclusions. There is as much debate about this hypothesis in the financial world as there is about religion among theologians. The argument may also go on without result. It should be noted, however. This hypothesis has been widely accepted in academia, in one form or another, and if there is evidence to disprove it, those who are most likely to reject it are not those who have evidence to disprove it, but those who simply do not like the conclusion.
Efficient market refers to a market where there are a large number of traders with fair information and active competition aiming at profit maximization. In such a market, prices at any given time reflect all available information and all events that are expected to occur in the foreseeable future. Priscilla & MIDdot; Holbrook Working was the first person to put forward the expectation theory in the field of futures. Expectation theory is based on the basic premise that futures can reflect changes in expected supply and demand rather than their immediate value.
It is a generally accepted fact that the basic laws of supply and demand determine the long-term price behavior of futures. Just as it is widely accepted that these rules do not provide similar conclusions in the short term. Most traders will agree that, in the short term, Basic factors. It is clear that there is no significant correlation with prices and that a large number of traders build and cancel futures positions in the short term. In the long run, supply and demand data are more effective at explaining why markets work the way they do than at predicting how they will work.
Those interested in analysing short-term price changes in speculative markets must understand the concept of efficient markets and their corresponding statistical models and random variations. It is up to the reader to decide whether or not to accept this theory, but if they are willing to do so, they should ensure that their data sources are unbiased. Efficient market theory proves that futures prices are difficult or impossible to predict. This view is very popular among the research departments and proposal publishers of many brokerage firms. As the surgeon General’s conclusion is popular with cigarette makers.
Even if stochastic models best estimate the short-term reality, long-term speculators can still benefit from long-term price changes if the average change in prices rises more than the average change in prices falls. If prices tend to rise, speculators gain steadily by taking on the risks passed on to them by hedgers, or they gain by being able to accurately predict price movements.
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