Lecture 7 Flashcards
1
Q
What are the types of market efficiency?
A
- Weak-form efficiency
- Semi-strong efficiency
- Strong-form efficiency
2
Q
What is weak form efficiency?
A
- Prices reflect historical price / volume data
- Technical analysis / ‘chartism’ doesn’t work
- Other analysis may work
3
Q
What is semi-strong effiency?
A
- Prices reflect all public information
- Inside information may help
4
Q
What is strong-form efficiency?
A
- Even inside information does not help
5
Q
What are some examples of anomalous outperformance?
A
- Small companies
- Low price / book value
- Low beta
- Short-term momentum
6
Q
How is insider trading identified?
A
Tracking cumulative abnormal returns
7
Q
What is the short-term outcome of insider trading?
A
Zero-sum game
8
Q
What is the wider outcome of insider trading?
A
Investors demand higher risk premium -> raises cost of capital
9
Q
What is market manipulation?
A
Spreading false info or conducting transactions to affect market prices
10
Q
What is ‘layering’?
A
- Place limit orders to buy
- Place many limit orders to sell
- Withdraw sell orders as soon as buy orders execute
- Reverse process to raise price before selling
11
Q
What is rogue trading?
A
Unauthorised trading in excess of risk limits
12
Q
What makes finance vulnerable to unethical behaviour?
A
- Complexity of instruments
- High turnover (IBGYBG)
- Limited shareholder involvement
