EMH Flashcards

1
Q

Prices will reflect all available information quickly and accurately

A

Fama,1970

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2
Q

Critique of Fama

A

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.

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3
Q

Test for Weak form

A

Return predictability tests- (Livermore,1923)

‘It never was my thinking that made me the big money. It was the sitting.’

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4
Q

Evidence for strong

A

(Jaffa,1974)

Insiders do possess serial information and outsiders can profit

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5
Q

Evidence against strong

A

(Shriller, 1981)

Stock prices are too volatile to be produced by rational investors

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6
Q

Evidence against weak

A

Size effect, Banz 1981

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7
Q

Size effect, Banz

A

1981- In the US smaller stocks outperformed large by 9%
Market mispricing smaller stocks
May not have been adjusted for risk

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8
Q

Against emh- Law of one Price violated

A

Lamont and Thaler, 2003

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9
Q

Lamont and Thaler

A

2003:

Royal Dutch petroleum merged with shell- 60/40 in 1907

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10
Q

Royal Dutch petroleum/ Shell Merge

A

1907- 60/40 merge- royal Dutch should be worth 1.5x shell, but were valued 30% too low and shell 15% too high

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11
Q

Test for semi strong

A

Event studies on news

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12
Q

Evidence against semi strong

A

P/e effect- low p/e perform 6% better

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13
Q

Against emh- Arguments against arbitrage

A

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

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14
Q

Argument against arbrutage- behaviour finance- link to bubbles

A

Unrational behaviour buying in mania phase when likely the price will fall e.g tulip mania

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