1 / 32

Chapter 3 Market Efficiency

Chapter 3 Market Efficiency. Presenter Venue Date. Definition of an Efficient Market. Factors Affecting Market Efficiency. Active versus Passive Investment Strategies. Factors Affecting a Market’s Efficiency. A market should be viewed as falling on a continuum between two extremes:.

briar
Télécharger la présentation

Chapter 3 Market Efficiency

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Chapter 3 Market Efficiency Presenter Venue Date

  2. Definition of an Efficient Market

  3. Factors Affecting Market Efficiency

  4. Active versus Passive Investment Strategies

  5. Factors Affecting a Market’s Efficiency A market should be viewed as falling on a continuum between two extremes: Continuum Completely Inefficient Completely Efficient Large Cap Stocks

  6. Forms of Market Efficiency (Fama 1970)

  7. Weak Form of Market Efficiency

  8. Semistrong Form of Market Efficiency

  9. The Event Study Process

  10. Strong Form of Market Efficiency Price

  11. What Form of Market Efficiency Exists?

  12. Questions • Is the expected return for stocks equal to zero in an efficient market? • Which hypothesis is being tested if a researcher examines stock price performance following earnings announcements? • Which hypothesis is being tested if a researcher examines stock price performance based on a 50-day and 200-day moving average of prices? • Why might a stock’s price not reflect everything management knows about their company?

  13. What Good Is Fundamental Analysis?

  14. What Good Is Technical Analysis?

  15. What Good Are Portfolio Managers?

  16. Market Pricing Anomalies

  17. EXHIBIT 3-3 Sampling of Observed Pricing Anomalies

  18. January (Turn-of-the-Year) Effect

  19. EXHIBIT 3-4 Other Calendar-Based Anomalies

  20. Overreaction and Momentum Anomalies

  21. Cross-Sectional Anomalies

  22. Closed-End Investment Funds

  23. Earnings Surprise

  24. Initial Public Offerings (IPOs)

  25. “Frontiers of Finance Survey”The Economist (9 October 1993) Many (anomalies) can be explained away. When transactions costs are taken into account, the fact that stock prices tend to over-react to news, falling back the day after good news and bouncing up the day after bad news, proves unexploitable: price reversals are always within the bid-ask spread. Others such as the small-firm effect, work for a few years and then fail for a few years. Others prove to be merely proxies for the reward for risk taking. Many have disappeared since (and because) attention has been drawn to them.

  26. Behavioral Finance versus Traditional Finance Behavioral Finance Assumes: • Investors suffer from cognitive biases that may lead to irrational decision making. • Investors may overreact or under-react to new information. Traditional Finance Assumes: • Investors behave rationally. • Investors process new information quickly and correctly.

  27. Loss Aversion

  28. Overconfidence

  29. Other Behavioral Biases

  30. Information Cascades

  31. If Investors Suffer from Cognitive Biases, Must Markets Be Inefficient? Theory suggests “Yes!” If investors must be rational for efficient markets to exist, then all the foibles of human investors suggest that markets cannot be efficient. Evidence suggests “No!” If all that is required for markets to be efficient is that investors cannot consistently beat the market on a risk-adjusted basis, then the evidence supports market efficiency.

  32. Summary • Definition of efficient markets • Different forms of market efficiency • Evidence regarding market efficiency • Implications for fundamental analysis, technical analysis, and portfolio management • Market pricing anomalies • Behavioral finance

More Related