Capital Markets - Market Efficiency Flashcards
Internal finance
Cash generated by a company: retained earnings, efficiency savings
External finance 2
- Equity
- Debt
Balance between internal and external finance 7
- Company attitude to risk and return
- Availability and amount of retained earnings
- Access to capital markets
- Costs of different sources of finance
- Dividend policy
- Investment opportunities
- Historical position
Key role of secondary market 3
- Increases liquidity of shares
- Generates pricing information
- Barometer of corporate performance
Weak form efficiency 2
- security prices reflects past information only, future prices cannot be predicted from historical data
- making abnormal returns using trading rules based on study past shares prices is not possible
Semi- strong form efficiency
Security prices reflects past information and all publicly available information EMH is true, not possible to make abnormal returns though studying company accounts
Strong form efficiency 2
- Securities prices reflect all available information ( publicly or not)
- Not possible to make abnormal returns
Market efficiency 4
- Operational efficiency - low transaction costs
- Informational efficiency- low cost access
- Pricing efficiency - prices of shares reflect all relevant available information
- Allocational efficiency- funds go to most efficient companies
Perfect Capital market 5
- No taxes or transaction costs
- Free entry and exit
- Many buyers and sellers
- Participants are utility maximizers
- Information is costless and freely available
Technical analysis
Drawing charts and using regression to predict prices based on past trends
Fundamental analysis 2
- Use of financial data to predict fair price of share accounts.
- Not possible on semi-strong
Implication of efficient market hippthesis EMH 6
- Paying for investment research will nor produce returns Same for studying financial statements
- No bargains on the stock exchange
- Buy and hold strategy is best
- Manipulation of accounts in pointless
- Timing of new issues is not critical
- Managers just need to focus on making the best investments decisions, since market capitalisation will increase bu NPV of project
Anomalies in share price behaviour
- Calendar effects
- Size anomalies
- Value effects
- Speculative bubbles
=> opposite to market efficiency
EMH
The efficient market hipothesis describes an efficient market as one where the prices of securities fully, fairly and quickly reflect all available information. Any new information that becomes available is quickly and accurately absorbed by participants in the market and through their actions is reflected in changes. The efficiency of the market is a result of market participants actively competing against each other.
