Scribd
Upload
101 views14 pages

Market Efficiency

The document discusses market efficiency and the efficient market hypothesis. It presents three levels of market efficiency - weak, semi-strong, and strong form - based on what information is reflected in stock prices. If markets are inefficient, some investors may be able to outperform by conducting their own research. The document also provides evidence both for and against market efficiency, such as studies showing investment analysts cannot consistently beat the market but also anomalies like the small-firm effect and January effect.

Uploaded by

MrMoney Man
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
101 views14 pages

Market Efficiency

The document discusses market efficiency and the efficient market hypothesis. It presents three levels of market efficiency - weak, semi-strong, and strong form - based on what information is reflected in stock prices. If markets are inefficient, some investors may be able to outperform by conducting their own research. The document also provides evidence both for and against market efficiency, such as studies showing investment analysts cannot consistently beat the market but also anomalies like the small-firm effect and January effect.

Uploaded by

MrMoney Man
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 14

MARKET EFFICIENCY

DR. GORMUS

Efficient Markets

In perfectly efficient markets, all


securities are priced correctly

Information is key
Prices

quickly and fully reflect all available


information
Prices offer expected return consistent with
risk level
Prices reflect past, current, and reasonably
inferred information
Price adjustments are unbiased

Efficient Market Hypothesis

Three levels of Market Efficiency

Weak form all historical data


Semi-strong form - public information
Strong form - all private (nonpublic)
information

Implications of Efficiency

Informational efficiency

If markets are not informationally efficient


Investors may not be able to trust that
market prices are up to date and investors
should then conduct their own research
(or hire a researcher) to validate the price.
Privileged groups of investors will be
able to consistently take advantage of
the general public.

8-4

Random Price Changes

Why are price changes random?

In very competitive markets prices


should react to only NEW information

Flow of NEW information is random

Therefore, price changes are random


Idea that stock prices follow a Random Walk

8-5

Evidence on Efficient Market Hypothesis

Favorable Evidence
1. Investment

analysts and mutual funds don't

beat
the market
2. Stock prices reflect publicly available info:
anticipated announcements don't affect
stock price
3. Stock prices and exchange rates close to
random walk
4. Technical analysis does not outperform
market

Evidence in Favor of Market


Efficiency

Performance of Investment Analysts


and Mutual Funds should not be
able to consistently beat the market

Mutual funds not only do not outperform


the market on average, but when they are
separated into groups according to whether
they had the highest or lowest profits in a
chosen period, the mutual funds that did
well in the first period do not beat the
market in the second period.

Evidence in Favor of Market Efficiency

Performance of Investment Analysts


and Mutual Funds should not be
able to consistently beat the market

Investment strategies using inside


information is the only proven method to
beat the market. In the U.S., it is illegal to
trade on such information, but that is not
true in all countries.

Evidence in Favor of Market Efficiency

Technical Analysis is the study past stock


price data, searching for patterns such as
trends and regular cycles, suggesting rules
for when to buy and sell stocks

The EMH suggests that technical analysis is a waste


of time
The simplest way to understand why is to use the
random-walk result that holds that past stock price data
cannot help predict changes
Therefore, technical analysis, which relies on such data
to produce its forecasts, should not successfully predict
changes in stock prices

Fundamental vs. Technical


Analysis

Fundamental Analysis
Technical Analysis

Self-fulfilling prophecy
Limits to arbitrage

Evidence Against Market


Efficiency
The Small-Firm Effect is an anomaly. Many empirical
studies have shown that small firms have earned
abnormally high returns over long periods of time,
even when the greater risk for these firms has been
considered.
The January Effect is the tendency of stock prices to
experience an abnormal positive return in the
month of January that is predictable and, hence,
inconsistent with random-walk behavior

Evidence Against Market


Efficiency

Market Overreaction: recent research


suggests that stock prices may overreact to
news announcements and that the pricing
errors are corrected only slowly

When corporations announce a major change in


earnings, say, a large decline, the stock price may
overshoot, and after an initial large decline, it may rise
back to more normal levels over a period of several
weeks.
This violates the EMH because an investor could earn
abnormally high returns, on average, by buying a stock
immediately after a poor earnings announcement and
then selling it after a couple of weeks when it has risen
back to normal levels.

Market Anomalies

Post-announcement Drift

Evidence Against Market


Efficiency

Mean Reversion: Some researchers


have found that stocks with low returns
today tend to have high returns in the
future, and vice versa.

Hence stocks that have done poorly in the


past are more likely to do well in the future
because mean reversion indicates that
there will be a predictable positive change
in the future price, suggesting that stock
prices are not a random walk.
Newer data is less conclusive; nevertheless,
mean reversion remains controversial.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy