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
What is CARt?
The cumulative average residual return
Can private information be used to predict future price changes?
No
How do we predict future price changes?
By searching and finding a group or class of investors who systematically earn superior returns, suggesting that private info can be used to predict future share prices
Could be professional fund managers, insiders etc.
Are semi-strongly efficient markets strongly efficient or weakly efficient?
Weakly
What does it mean for fundamental analysis if the market is weakly efficient?
It will be ineffective
