EMH Flashcards
Prices will reflect all available information quickly and accurately
Fama,1970
Critique of Fama
Jensen,1978
Prices reflect information up to the point that marginal benefits received don’t exceed to the marginal cost of quoting and acting on the information.
Test for Weak form
Return predictability tests- (Livermore,1923)
‘It never was my thinking that made me the big money. It was the sitting.’
Evidence for strong
(Jaffa,1974)
Insiders do possess serial information and outsiders can profit
Evidence against strong
(Shriller, 1981)
Stock prices are too volatile to be produced by rational investors
Evidence against weak
Size effect, Banz 1981
Size effect, Banz
1981- In the US smaller stocks outperformed large by 9%
Market mispricing smaller stocks
May not have been adjusted for risk
Against emh- Law of one Price violated
Lamont and Thaler, 2003
Lamont and Thaler
2003:
Royal Dutch petroleum merged with shell- 60/40 in 1907
Royal Dutch petroleum/ Shell Merge
1907- 60/40 merge- royal Dutch should be worth 1.5x shell, but were valued 30% too low and shell 15% too high
Test for semi strong
Event studies on news
Evidence against semi strong
P/e effect- low p/e perform 6% better
Against emh- Arguments against arbitrage
Markets must be inefficient or they’d never profit
Not all shares have a perfect substitute- to long and short
Behavioural finance- investors are rational profit maximisers- not true- moral hazard- mental short cuts
Argument against arbrutage- behaviour finance- link to bubbles
Unrational behaviour buying in mania phase when likely the price will fall e.g tulip mania