Chicken-Egg Dilemma for the Relationship Between Price and Volume in Borsa Istanbul

Theory: Efficient Markets

According to the efficient markets (EM) theory, securities prices fully reflect all available information. While it is impossible to obtain an economic profit with the current information-based transactions, the market is efficient. In an ideal market, prices give the right signals for resource allocation so firms can make production-investment decisions while investors are making investment decisions on the assumption that market prices always reflect “full knowledge” (Fama, 1970). The basic assumptions of EM are “the lack of information costs” and “the lack of transaction costs”. However, new approaches to the market activity hypothesis have been developed in the real world because of the existence of the transaction costs. In an efficient market, a large number of investors have obtained information on securities at low cost; the transaction expenses are low, the liquidity is high. Thus, economic, social and political changes are spread rapidly in the market and reflected in the prices of the securities which change in an independent and random manner.

The initial definitions of EM are based on the random walk model. This model argues that any asset price cannot be estimated with the past price information. All of the available information in the market has been reflected in the price, and the existing price in the market is the real price. The efficiency have been tested empirically in three forms, as “Weak Form Efficiency”, “Semi-Strong Form Efficiency” and “Strong Form Efficiency” (Fama, 1970).