The Information Efficiency of Stock Markets - Innovative Management in Information and Production - page 205

Let E I denote information efficiency of the stock market. E I can be determined
by the following mapping:

F : Ω × S → R ,

E I = G ( ω , s )= g ( D )= g (( d 1 ( ω , s 1 ) , d 2 ( ω , s 2 ) ,···, d n ( ω , s n ))) (6)

So the information efficiency of the stock market is determined by the
completeness degree of market information, transmission mechanism of market
information, and operation mechanism of markets.
According to the above analysis, within our information framework, the
conditions for maximizing information efficiency E I of a stock market are (1) the
relevant information are fully disclosed and uniformly distributed to participants,
i.e., there is no information asymmetry; (2) information transmission and operation
mechanisms of the market are sufficiently effective; (3) market participants make
rational judgments on the information; (4) the information completeness degree D
achieves maximum.
However, in the practical stock market, the information contains noise, the
information collection costs money and time, and different participants may possess
different capabilities in information collection and analysis; therefore the informa-
tion owned by market participants is incomplete and asymmetrical, i.e., d

( ω , s i ) < 0

for some i . Hence information efficiency E I of practical stock markets

cannot achieve maximum.

∈ N , ω ∈ ω

4 Conclusion

In this research, we formally define the information in sense of economy. Based
on the information modeling, a stock market's information efficiency E I is optimal
when its transmission and operation mechanisms are sufficiently effective and
its information completeness degree D reaches maximum. Optimal information
efficiency of a stock market can ensure high effectiveness of the stock market and
form a long-term stable dynamic equilibrium on the stock price.
In real stock markets, the real information efficiency values vary for the degrees
of the information completeness and symmetry, as well as the rationality degree of
market participants. When degrees of information asymmetry and incompetence and
participant irrationality are pretty high, the information efficiency will be greatly
impaired. The consequence is abnormal volatility in security price which is more
frequent, and the market is very difficult to achieve stable dynamic equilibrium.
In this research, from the perspectives of listed companies, state departments, media,
and investors, we discuss feasible supervision countermeasures for real stock market
to make information efficiency approach the optimal value.