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Capital Market Efficiency The concepts. Topics. What if you figure a stock price moving pattern? Some formal definitions Implications of Market efficiency Hypothesis Price modeling Empirical studies. What if?DefinitionsImplicationsPriceEmpirics. What if.
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Capital Market EfficiencyThe concepts
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
Sell
Sell
Buy
Buy
Investor behavior tends to eliminate any profit opportunity associated with stock price patterns.
Stock Price
If it were possible to make big money simply by finding “the pattern” in the stock price movements, everyone would do it and the profits would be competed away.
Time
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
All Available Information including inside or private information
All Public Information
Information in past stock prices
What if?DefinitionsImplicationsPriceEmpirics
Since we are more interested in how efficient is the capital market, we define the following 3 forms of market efficiency hypothesis:
“A market is efficient if it reflects ALL available information”
[1] Strong-form
- ALL available info
[2] Semi-strong form
- ALL available info
[3] Weak-form
- ALL available info
All Available Information including inside or private information
All Public Information
Information in past stock prices
What if?DefinitionsImplicationsPriceEmpirics
“Stock prices are assumed to reflect any information that may be contained in the past history of the stock price itself.”
What if?DefinitionsImplicationsPriceEmpirics
“Stock prices are assumed to reflect any information that is publicly available.”
What if?DefinitionsImplicationsPriceEmpirics
“Stock prices are assumed to reflect ALL information, regardless of them being public or private.”
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
=> 0<Total contribution ≠ marginal contribution=0
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
Abnormal return = actual return – expected return
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
Stock price ($)
Days relative to announcement day
-t
0
+t
The timing for a positive news
What if?DefinitionsImplicationsPriceEmpirics
Stock price ($)
Days relative to announcement day
-t
0
+t
If the market is efficient,
1) at time 0, the positive news come, there is an immediate up in the stock price to the RIGHT level. (i.e., the PINK path)
2) There is no delays in analyzing news and slowly reflecting in the stock price like the ORANGE path does.
3) There is also no over-reaction like the BLUE path does, and then subsequently adjustment back to the correct level.
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics
What if?DefinitionsImplicationsPriceEmpirics