Question

Describe how asymmetric information relates to efficient market hypothesis.
Explain with your own words (150-250 words approx.)

Answer 1

Asymmetric information is a information failure which occure when one party has knowledge of the information and others are deprived of that information and the one knows about it take the advantage of it.

Efficient market hypothesis is a imagination or thoery in economics that states all the market information is incorporated in the stock price of the assets and new information comes to the market on a random basis and affects the asset price instantly.In this case no body canearn super normal profits consistently.

Asymmetric information is the previelged information to the investor and if someone has this information in the efficient market than they cannot make super normal profits consistently because everyone will come to know about this information and this will bring stock price back to normal. FAMA has divided markets in the three form that is Strong,semi strong and weak forms. Asymmetric information will help in only the weak and little bit in semi strong form but it will not help in strong form to earn the super normal profits as stock price involve all information as well as privileged information therefore all technical and fundamental analysis and insider information become useless.