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On the Efficient Market Equilibrium and the Pricing of Equities: A Fundamental Approach to Real Time Pricing

Y. I. T. Mtulia

Howard University - School of Business

December 31, 2009

The extraordinary events of September 2008 suggest that the prevailing framework of financial economics is ineffective. The elegant microeconomic approach to real time asset pricing is not effective. In what follows, it is suggested that swift price adjustments and real time asset pricing could more effectively be understood using fundamental analysis, when the ratios of return to risk are in equilibrium. The model expands on time tested finance principles to account for continuous changes to expected returns, from which adjustments to asset values can be assessed in real time. The efficient market equilibrium is a quantifiable market condition that can be used to compare value between any two investments based simply on their expected return and risk distributions. From this, follow the computation of real time discount rates which are in agreement with the CAPM, the pricing of equities in real time, the analysis of price adjustments in real time and the understanding of bull and bear markets in real time. The conclusion is that swift price adjustments including panics, are more effectively understood using fundamental finance, whenever prices deviate from their equilibriums. While most of the results here discussed predate the theory, suggested tests can be used to verify its predictions.

Number of Pages in PDF File: 23

Keywords: Market efficiency, random prices, time value of money, neutrality of money, price equilibrium, arbitrage, CAPM, expected returns, panics, bull and bear markets, fed model.

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Date posted: January 29, 2010 ; Last revised: April 21, 2010

Suggested Citation

Mtulia, Y. I. T., On the Efficient Market Equilibrium and the Pricing of Equities: A Fundamental Approach to Real Time Pricing (December 31, 2009). Available at SSRN: http://ssrn.com/abstract=1544011 or http://dx.doi.org/10.2139/ssrn.1544011

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Yussuf I Mtulia (Contact Author)
Howard University - School of Business ( email )
Washington, DC 20059
United States
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