Lecture 7 Flashcards
Market efficiency - operational
Transaction costs are kept to a minimum
Market efficiency - allocational
Prices are determined by equating the marginal returns of all producers and savers
Market efficiency - informational
All relevant info is fully and instantaneously priced in
What are Fama’s 3 levels?
Weak form efficient
Semi-strong form efficient
Strong-form efficient
Expand on weak form efficient (Fama’s 3 levels)
Security prices fully and instantaneously
Reflect info contained in past prices
Expand on semi-strong form efficient (Fama’s 3 levels)
Security prices fully and instantaneously
Reflect all publicly available info
Expand on strong form efficient (Fama’s 3 levels)
Security prices fully and instantaneously
Reflect all available info whether public or private
Can past price changes be used to predict future price changes?
No
What is a run (test)?
A sequence of price changes of the same sign
Can published information be used to predict future price changes?
No
What are relevant events (testing semi-strong form efficiency)?
Receiving or making a takeover bid
Announcing a dividend change
Announcing a major investment project
Announcing a share buyback
How do we know if it has an effect (testing semi-strong form efficiency)?
Measure relative to what would’ve occurred otherwise if had responded normally
How do you calculate residual return?
Actual return - predicted normal return
Where the predicted normal return is based on that of a representative sample such as a sectoral index or an estimate such as the CAPM
What is Rit
The residual return of the i-th company in period t
What is Rit bar?
The average residual return in period t
