Ch 7 - Efficient market hypothesis and market predictability Flashcards
What is the efficient markets hypothesis?
Market prices of financial assets fully reflect all available information about the value of an asset
What is Jensen’s definition of market efficiency?
A market is efficient with respect to information set t if it is impossible to make economic profits by trading on the basis of information set t
What did Malkield refine the market efficiency definition to?
A market market is efficient if it fully and correctly reflects all relevant information in determining securities prices. If the market is efficient with respect to some information set t, then securities prices would be unaffected by revealing that information to all participants
What are the 3 elements of importance when defining market efficiency?
- the information set
- the ability to exploit the information in a trading strategy
- the performance measure for the trading strategy us economic profits
What are the 3 types of market efficiency defined by Roberts?
Weak form (historic values of the asset price, dividends, etc…) , semi strong ( public +past), strong (public+past+private)
What was Black’s proposition?
In addition to the no arbitrage condition, a market efficiency definition should include some reference to possible deviations from market price from the fundamental value (bubbles). He proposed that the price should be within a factor of two of the intrinsic value of the assets
What are 4 market frictions that could explain the absence of arbitrage opportunities even in the presence of bubbles?
Transaction costs, information processing costs, market impact and trading restrictions
What is the Timmerman and Granger definition of an efficient market?
A market if efficient with respect to information set t, search technologies St and forecasting models t if it is impossible to make economics profits by trading on the basis of a forecasting model in forecasting model t, selected with search tech St based on predictor values in information set t
What is the significance level of a test?
How often we’re prepared to falsely reject the null hypothesis
What is the power of a test?
Proportion of time we reject the null hypothesis when the null is false. A good test has a high power. Equal to 1- Type 2 error
What is a bubble?
The price of a financial asset far exceed its intrinsic value over a sustained period of time
What is arbitrage?
A situation where an individual can me non zero return at zero risk
What is ephemeral forecastability?
A situation where the predictive power of a particular trading rule or observation disappears once it has become public knowledge
What is data snooping?
The fact that only statistically significant relationships are reported.
