Efficient versus inefficient market l.jpg
This presentation is the property of its rightful owner.
1 / 24

Efficient versus Inefficient Market PowerPoint PPT Presentation

Efficient versus Inefficient Market Market Efficiency Random walk versus market efficiency Versions of market efficiency Technical analysis Predictors of future returns and market anomalies Behavioral finance Cumulative Abnormal Returns Around Takeover Attempts: Target Companies

Download Presentation

Efficient versus Inefficient Market

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript

Efficient versus inefficient market l.jpg

Efficient versus Inefficient Market

  • Market Efficiency

    • Random walk versus market efficiency

    • Versions of market efficiency

    • Technical analysis

    • Predictors of future returns and market anomalies

    • Behavioral finance

Cumulative abnormal returns around takeover attempts target companies l.jpg

Cumulative Abnormal Returns Around Takeover Attempts: Target Companies

Stock price reaction to cnbc reports l.jpg

Stock Price Reaction to CNBC Reports

Emh and competition l.jpg

EMH and Competition

  • Stock prices fully and accurately reflect publicly available information.

  • Once information becomes available, market participants analyze it.

  • Competition assures prices reflect information.

  • Read “Are Markets Efficient?” on page 387

Forms of the emh l.jpg

Forms of the EMH

  • Weak

  • Semi-strong

  • Strong

    • See page 361.

Types of stock analysis l.jpg

Types of Stock Analysis

  • Technical Analysis - using prices and volume information to predict future prices.

    • Weak form efficiency & technical analysis

    • Chartist

    • Relative strength versus resistance levels

  • Fundamental Analysis - using economic and accounting information to predict stock prices.

    • Semi strong form efficiency & fundamental analysis

Trend and corrections l.jpg

Trend and Corrections

  • Dow theory – page 407-409

    • Primary trend

    • Secondary/intermediate trend

    • Tertiary or minor trends

  • Moving average

    • Typically 200 days or 53 weeks

    • Bullish versus bearish – page 411

  • Breadth – page 411

    • Advances versus declines – page 411

  • Sentiment indicator

    • Trin statistic

    • Confidence index

    • Put-call ratio

Active or passive management l.jpg

Active or Passive Management

  • Active Management

    • Security analysis

    • Timing

  • Passive Management

    • Buy and Hold

    • Index Funds

Market efficiency portfolio management l.jpg

Market Efficiency & Portfolio Management

Even if the market is efficient a role exists for portfolio management:

  • Appropriate risk level

  • Tax considerations

  • Other considerations

Empirical tests of market efficiency l.jpg

Empirical Tests of Market Efficiency

  • Event studies

  • Assessing performance of professional managers

  • Testing some trading rule

Issues in examining the results l.jpg

Issues in Examining the Results

  • Magnitude Issue

  • Selection Bias Issue: investing in small stocks

  • Lucky Event Issue

Weak form tests l.jpg

Weak-Form Tests

  • Serial Correlation

  • Momentum

  • Returns over Long Horizons

Predictors of broad market returns l.jpg

Predictors of Broad Market Returns

  • Fama and French

    • Aggregate returns are higher with higher dividend ratios

  • Campbell and Shiller

    • Earnings yield can predict market returns

  • Keim and Stambaugh

    • Bond spreads can predict market returns

Anomalies l.jpg


  • P/E Effect

  • Small Firm Effect (January Effect)

  • Neglected Firm

  • Book-to-Market Effects

  • Post-Earnings Announcement Drift

Slide15 l.jpg

Returns in Excess of Risk-Free Rate and in excess of the Security Market Line for 10 Size-Based Portfolios, 1926 – 2005

Average monthly returns as a function of the book to market ratio 1963 2004 l.jpg

Average Monthly Returns as a Function of the Book-To Market Ratio, 1963 – 2004

Cumulative abnormal returns in response to earnings announcements l.jpg

Cumulative Abnormal Returns in Response to Earnings Announcements

Mutual fund performance l.jpg

Mutual Fund Performance

  • Some evidence of persistent positive and negative performance.

  • Potential measurement error for benchmark returns.

    • Style changes

    • May be risk premiums

Persistence of mutual fund performance l.jpg

Persistence of Mutual Fund Performance

Behavioral finance l.jpg

Behavioral Finance

  • Investors Do Not Always Process Information Correctly

  • Investors Often Make Inconsistent or Systematically Suboptimal Decisions

Behavioral biases l.jpg

Behavioral Biases

  • Framing

    • Decisions seem to be affected by how choices are framed – page 398

  • Mental Accounting

    • A special form of framing in which people segregate certain decisions

  • Regret Avoidance

    • Individuals would have more regrets when their decisions are more unconventional

  • Prospect Theory

    • Traders become risk seeking after they lose money

Prospect theory graphs l.jpg

Prospect Theory Graphs

Limits to arbitrage l.jpg

Limits to Arbitrage

  • Fundamental Risk

  • Implementation Costs

  • Model Risk

Limits to arbitrage and the law of one price l.jpg

Limits to Arbitrage and the Law of One Price

  • Siamese Twin Companies

  • Equity Carve-outs

  • Closed-End Funds

  • Login