Are financial markets efficient?
The case of the Moroccan All Shares Index

Final Report for the Investment course

杨海军

Candidate: Aymen Hajlaoui

School of Economics and Management
Beihang University, Beijing, China

1. Nestlé struggles with enterprise systems

1.1. Principle

The efficiency of financial markets is a theory derived from the concept of pure and perfect markets designed in the nineteenth century, whose definition is evolving. The first definition of market efficiency comes from Eugene Fama in the 1970s, who defined an efficient financial market as one in which prices always fully reflect available information.

To achieve appropriate functioning of markets, five conditions related to Fama’s definition must be applied:
Investors’ rationality, that is to say that any anticipation following a positive event must lead the investor to buy (or maintain) and any anticipation following a negative information should lead the investor to sell. We speak of rational expectations.
The free flow of information and instant reaction of investors to the asset price instantly integrates available information. This assumes that all agents can receive the same information at the same time and they can all immediately operate on the market under identical conditions.
Free information to prevent the deliberate non-reaction in view of price that might be too high in relation to the possibilities of the rate’s evolution.
The absences of transaction costs and stamp duty that may have to accordingly cancel potential gains, in which case investors would have no interest in intervening.
The atomicity of investors and liquidity; an investor will not sell its shares if this compromises can bring down the share price.

It follows from the assumption of efficiency that it affects all markets, all sectors and all forms of financial assets, that drastic conditions are met on information and especially that no investor can exploit the information seen to make a profit and that, inevitably, reading ahead the value of an asset is impossible.

In the long term, it is normally impossible to outperform the market; this idea corresponds to the informational efficiency. Efficiency in the assessment of the fundamental value is present when the market price reflects the actual value of the listed company; a third type of efficiency is that of risk diversification and allocative efficiency represents a synthesis of the three mentioned above.

Because the assumptions and conditions of the theory of market efficiency generally aren’t verified as a result of the force of the definition of Fama, Jensen suggested in 1978 another definition: a market is efficient if the prices of listed assets include their information so that an investor can, by buying or selling this asset, gain a higher profit on the transaction costs of this action. Jensen therefore emphasizes the impossibility of achieving profit and excludes the absence of transaction costs. Conclusions from the analysis about market efficiency may depend on the definition on which it is based. We will rely on the definition of Fama which is usually considered the most complete and richest.

1.2. The three forms of market efficiency

Following the definition of Fama, we can assign three different degrees to the theory of efficient financial markets, depending on the nature of information: already known, present or preferred. The various forms of efficiency therefore apply to the informational condition.

The weak form argues that it is not possible to draw on past information for a financial asset to predict the future evolution of the price of the asset; that is to say, the price of an asset takes into account all the information contained in past prices. Therefore, an investor cannot make a profit under the weak form of efficiency because its forecast born of past price analysis are uncertain. Tests were