Chapter 4 Efficient Market Hypothesis Flashcards
Weak-form EMH
In short, prices reflect all historical information
Semi-strong EMH
In short, prices reflect all public information
Strong EMH
prices reflect all public and private information
Weak EMH
Statistical tests of independence
Autocorrelationtests
Runs tests
Testing results generally_______
support the weak-form EMH, but results are not unanimous
Semi-strong EMH
Two sets of studies:
Time series analysis of returns or the cross-section distribution of returns for individual stocks.
Event studies that examine how fast stock prices adjust to specific significant economic events.
Semi strong EMH:
Return Prediction studies: Quarterly earnings reports may yield abnormal returns due to?
Does it support the EMH?
unanticipated earnings surprise.
No.
Semi-strong EMH
Return Prediction Studies:
The reason for the January anomaly.
Does it support the EMH?
Tax selling toward the end of the year.
No.
Semi-strong EMH:
Predicting Cross-Sectional Returns:
Price-earnings ratios research results that:
Publicly available P/E ratios possess valuable information regarding future returns.
This is inconsistent with semistrong efficiency
Semi-strong EMH:
Predicting Cross-Sectional Returns:
Price-Earnings/Growth Rate (PEG) Ratios
Studies have hypothesised an inverse relationship
between the PEG ratio and subsequent rates of
return. This is inconsistent with the EMH
Semi-strong EMH:
Predicting Cross-Sectional Returns:
The size effect:
Does it support the EMH?
The studies indicate that risk-adjusted returns for extended periods indicate that the small firms consistently experienced significantly larger risk- adjusted returns than large firms.
No.
Semi-strong EMH:
Predicting Cross-Sectional Returns:
Neglected firm effect caused by…….
lack of information and limited institutional interest
Semi-strong EMH:
Predicting Cross-Sectional Returns:
Book value to market value ratio:
Significantpositiverelationshipfoundbetween current values for this ratio and future stock returns.
Results inconsistent with the EMH
Semi-strong EMH:
Event Studies:
Stock split studies show…….
Does this confirm the EMH
that splits do not result in abnormal gains after the split.
Yes
Semi-strong EMH:
Event Studies:
Do IPO research confirm the EMH?
Yes because the price is adjusted within one day after the offering
Semi-strong EMH:
Event Studies:
Listing of a stock on an national exchange. Does it confirm the EMH?
No, Because the nation exchange listing may offer some short term profit opportunities for investors.
Semi-strong EMH:
Event Studies:
Do stock prices adjust rapidly to unexpected world events and economic news?
Does this confirm the EMH?
The do adjust rapidly, and hence do not provide opportunities for abnormal profits.
Yes it does.
Semi-strong EMH:
Summary of results:
-event studies
-Predicting Cross-Sectional Returns
- Studies on events- indicate strong support for semi-strong EMH with the exception of exchange listing studies
- Studies on Predicting Cross-Sectional Returns- indicates markets are not semistrong efficient
Tests of Strong-form EMH:
Testing Groups of Investors:
Corporate insiders
Security analysts
Professionalmoneymanagers
