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Efficient Capital Markets: II

Efficient Capital Markets: II. Eugene F. Fama (1991) Presentation by: Oktavia 0806479074. OUTLINE. The Theme The Main Areas of Research Return Predictability: Time-Varying Expected Returns Cross-Sectional Return Predictability Event Studies Tests for Private Information Conclusions.

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Efficient Capital Markets: II

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  1. Efficient Capital Markets: II Eugene F. Fama (1991) Presentation by: Oktavia 0806479074

  2. OUTLINE • The Theme • The Main Areas of Research • Return Predictability: Time-Varying Expected Returns • Cross-Sectional Return Predictability • Event Studies • Tests for Private Information • Conclusions

  3. The Theme Market efficiency hypothesis: • Security prices fully reflect all available information (Fama, 1991) • Prices reflect information to the point where the marginal benefits of acting on information (the profit to be made) do not exceed the marginal costs (Jensen, 1978)

  4. The Theme….. Cont’d • Does the fact that market efficiency must be tested jointly with an equilibrium-pricing model make empirical research work on efficiency uninteresting? • Does the joint hypothesis problem make empirical work on asset-pricing models uninteresting?

  5. The Theme….. Cont’d Fama answer is: an unequivocal no

  6. The Main Areas of Research Three categories of market efficiency: • Weak-form • Semi-strong-form • Strong-form

  7. The Main Areas of ResearchCont’d Past test Recent test Includes variables like: dividend yields and interest rates Weak-form : • Only use past returns

  8. The Main Areas of ResearchCont’d Past test Recent test Event studies Semi-Strong-Form: • Test of adjustment of prices to public announcements

  9. The Main Areas of ResearchCont’d Past test Recent test Tests for private information Strong-form: • Tests of whether specific investors have information not in market price

  10. Return Predictability: Time-Varying Expected Returns • Past Returns • Short-Horizon Returns • Long-Horizon Returns • The Constrarians

  11. B. Other Forecasting • The Evidence • Market Efficiency • A Caveat

  12. C. Volatility Tests and Seasonals in Returns • Volatility Tests • Return Seasonality

  13. Cross-Sectional Return Predictability Asset-pricing model: • Sharpe-Lintner-Black (SLB) Model • Multifactor Models • Consumption-Based Asset-Pricing Models

  14. Cross-Sectional Return Predictability …….. Cont’d Where Do We Stand ??? • The Bad News • The Good News

  15. Event Studies • Some of the Main Results • Market Efficiency

  16. Test for Private Information • Insider Trading • Security Analysis • Professional Portfolio Management

  17. Conclusions • Event Studies • The cleanest evidence on market-efficiency comes from event studies, especially event studies on daily returns. • average stock prices adjust quickly to information about investment decision, dividend changes, changes in capital structure, and corporate control transactions. • Prices adjust efficiently to firm-specific information

  18. B. Private Information • Unlike event studies, however, evaluating the access of investment managers to private information involves measuring abnormal returns over long periods • Now, performance measurement relative to passive benchmarks is the rule, and there are firms that specialize in evaluating professional managers • The data generated by these firms are a resource for tests for private information that academics have hardly tapped

  19. C. Return Predictability • The new research produces precise evidence on the predictability of daily and weekly returns from past returns, but the results are similar to those in the early work, and somewhat lacking in drama. • The new research on the predictability of long horizon stock returns from past returns is high on drama but short on precision

  20. To know more about the links between expected returns and the macro-variables, the task has at least two parts: • If the variation in expected returns traces to shocks to tastes or technology, then the variation in expected returns should be common across different securities and markets • The second interesting task is to dig deeper and establish links between expected returns and business conditions

  21. End of Session Thank You

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