Regional Integration Without empire

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Efficient Capital Markets and Anomalies.

Efficient Capital Markets and Anomalies 1 Efficient Capital Markets and Anomalies Chapter 8 2 Background If investors ignore information, market prices of securities will not react to news announcements Security prices that do not fully reflect public information are said to be weakly efficient prices A weakly efficient price drifts further away from the securitys value than a semi-strongly efficient price Good investors can use these inefficiencies to earn trading profits 3 Background A perfectly efficient price reflect all knowable information about the security Always equal to the securitys value Value can change continuously to reflect arrival of new information Good financial analysts that are active traders will be unable to earn returns sufficient to compensate them for their costs and still yield an economic profit in a perfectly efficient market All securities are priced correctly 4 Background This chapter examines security price behavior and pricing inefficiencies Pricing inefficiencies provide profit opportunities Levels of pricing efficiency Weakly Efficient Market Hypothesis Market prices reflect all historical information Semi-strong Efficient Market Hypothesis Market prices reflect all public information including all historical information mentioned above Perfectly or Strong Efficient Market Hypothesis Market prices reflect everything that is knowable, including inside information 5 Background Security prices should not move along smoothly Rapid price movements due to new information should cause randomness in successive price changes, not a smooth continuity Randomness means that a trend-like series of small upward or downward prices moves is not likely to occur If a price change is to happen, it should happen all at once, not in a series of small movements 6 Background Good News Bad News New information arrives in the market on day t.

Which is easy to obtain and cheap Technicians focus on past security prices Look for meaningful trends in historical security prices Attempt to extract predictions from whatever patterns they find 9 Filter Rules An X filter is a mechanical trading rule If a securitys price rises by at least X, buy and hold until the price peaks and falls by at least X When price decreases from a peak level by X, liquidate long position and sell short Hold short position until price reaches a low point and then begins to rise If when the price rises above X, cover the short position and go long 10 Filter Rules Different filter rules can be testing by changing the X value If stock prices fluctuate randomly, filter rules should not outperform randomly chosen stocks 11 Figure Using a 10 Filter Rule to Trade a Security 12 Filter Rules Filters ranging from.

Thus, some positive serial correlation is found But, technical analysts focus on short-term trends 14 Serial Correlation Tests So, do daily or weekly price change trends exist and, if so, can they be used to earning a trading profit after commission? Information signaling hypothesis Companies can conserve cash while sending a signal to the public about future earnings growth Liquidity hypothesis Reduces the stocks market price making it more affordable to small investors 29 Stock Splits and Stock Dividends Fama, Fisher, Jensen and Roll studied stock splits and stock dividends Calculated a characteristic line for each stock analyzed and examined the residual errors If residual error at time of event was zero, the securitys actual rate of return equaled the predicted rate of return, and the event had no impact on the return If residual error were positive negative the assets return was greater lower than expected Residual errors were averaged over the stocks Reduces the influence of other effects events 30 Stock Splits and Stock Dividends FFJR find that the monthly residual error tended to be increasingly positive in the 30 months preceding the split or stock dividend After the event the average residuals fluctuate around zero for the next 30 months They evaluated the cumulative average monthly residuals when companies subsequently Increased their cash dividend payments Have small positive residuals in the months after the event Decreased their cash dividend payments Have larger negative residuals in the months after the event 31 Stock Splits and Stock Dividends In the long-run, stock splits and stock dividends do not seem to impact The liquidity of the split stocks The market value of the firm Investors returns If an investor can correctly predict which companies are going to split, it may be possible to earn excess returns Studies involving stock splits and stock dividends appear to support the semi-strong efficient market hypothesis 32 Anomaly Size Effect Banz Reinganum show that small company stocks earned higher rates of return than large company stocks, on average Size based on market capitalization Found that small cap stocks were also riskier, but even after adjusting for risk the size effect remained Even after adjusting for the impact of infrequent price changes the size effect remained 33 Inter-Relationship Between January and Size Effects Keim found that abnormal returns in February through December tend to be similar But, small firms experience a positive January effect while large firms experience a negative January effect Why this occurs is unknown This appears to be a worldwide phenomenon 34 Growth-Value Anomaly Semi-strong form of EMH suggests that money managers who use a particular management style should not consistently outperform managers using another management style Value managers Seek undervalued stocks which they purchase, hold and sell when the price reaches the stocks value Typically buy stocks with low P-E ratios, below average earnings growth rates, high cash dividend yields and low price-to-book values Growth manager Seek stocks enjoying a high rate of earnings growth which is expected to continue Typically buy stocks with high P-E ratios, high Price-to-book values and low cash dividend yields 35 Growth-Value Anomaly Both of these management styles are popular and are frequently compared Value stock investors have historically outperformed growth stock investors on a risk-adjusted basis over extended periods of time Growth managers seem to over-estimate growth rates and therefore receive lower returns 36 Growth-Value Anomaly Investors can analyze three different ratios to make quantitative distinctions between growth and value stocks Current yield cash dividend per share?

Value Investing Capaul, Rowley and Sharpe analyzed a similar investing strategy on an international level Find that value investing seems to outperform growth investing Constitutes an anomaly to the semi-strong form of efficient market hypothesis 41 Tests of Strong Form Efficiency Mutual funds are managed by professional money managers Do these funds offer superior performance? Findings Large funds perform no better than small funds Funds with high turnover perform slightly worse than funds with low turnover Funds charging a load fee perform slightly worse than no-load funds Funds with high management fees perform slightly worse than funds with low management fees Majority of equity mutual funds in U.

Value Line Investment Survey www. Jaffe performed an event study If a security had three or more net insiders as buyers sellers Jaffe assumed a balance of favorable unfavorable inside information existed for that corporation Results indicate that the average insider did not earn enough after one month to pay their commission costs After 8 months the average insiders gained 5.

Millions of investors select passive investing because they believe the anomalies are small Million of investors select active investing because they think the anomalies offer the opportunity for profitable trading Still others combine the above methods.

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Many of them are also animated. Chapter 9 The Capital Markets and Market Efficiency - New York Stock Exchange NYSE American Stock Exchange AMEX Chicago Board of Trade Chartists look for patterns in a sequence of stock prices PowerPoint PPT presentation free to view.

Stocks, Stock Markets, and Market Efficiency - 8.

Illiquid Markets. Money Management | sotoyege.web.fc2.com

Stocks, Stock Markets, and Market Efficiency Common stock Stock market indexes Stock valuation Efficient Markets Theory About common stock Share of firm s The Essentials of An Efficient Market and Implications for Investors, Firms and Regulators - The Essentials of An Efficient Market and Implications for Investors, Firms Stocks, Stock Markets, and Market Efficiency - No profitable trading on news.

Investors overreact to the news, causing the stock price to overshoot is true value The Efficient Capital Markets and Behavioral Finance - The efficient market hypothesis EMH deals with informational efficiency. Why does it matter? Imagine that you are planning a vacation to Thailand in six months.

Market Efficiency and Empirical Evidence - Then, the three calculated alphas would be summed to get the '3-day CAR. Measure average CAR for these firms during the days before and after the EFFICIENT CAPITAL MARKETS Short Term Stock Return Reversals and Efficient Markets Hypothesis - A special case of the above model is the martingale model: The Efficient Markets Hypothesis Efficient Capital Markets - In the discussion, we emphasize on the stock market evidence Stock prices quickly adjust to unexpected world events and economic news and Chapter 6 Efficient Capital Markets - New information regarding securities comes to the market in a random fashion Chapter 13 Efficient Capital Markets - Understand the differences between the three forms New information comes to the market in a random fashion Efficient market response to 'bad news' Efficient Capital Markets - New information regarding securities comes to the market in a random fashion Risk, Return and Market Efficiency - People have various views of how efficient are financial markets this is a Market Efficiency and Long-term Financing - An efficient capital market is one in which the purchase or sale of Stock Market Reaction to.

On average stock prices fall.

Analysis of Stock Market Anomalies worldwide

A Rational Approach to an Irrational Market Practical Methods for Exploiting Market Anomalies - In the US and UK, 60 days following an earnings announcement, stocks with the Follow the market maxim: Sell your losses stop loss and ride your winners International Portfolios, Capital Accumulation and Foreign Asset Dynamics N.

Martin Discussion Sumru Altug Ko - This paper integrates International Real Business Cycle IRBC Chapter 13 Corporate Financing and Market Efficiency - The movement of stock prices from day to day DO NOT reflect any pattern.

In , RBC Dominion Securities was the leading underwriter by revenue. Corporate Financing Decisions and Market Efficiency October 19, the stock market dropped between 20 and Efficient Capital Markets Learning Objectives - New information regarding securities comes to the market in a random fashion Efficient Capital Markets - Information efficiency vs.

Forms of informational efficiency Most important application of APT is to option pricing Discuss the meaning of the random walk hypothesis and provide a balanced judgement of the usefulness of past price movements to predict future share prices weak-form efficiency - Discuss the meaning of the random walk hypothesis and provide a balanced WARREN BUFFETT and CHARLES MUNGER.

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