Chapter 16 Market efficiency and active portfolio management Fan longzhen
Chapter 16 Market efficiency and active portfolio management Fan Longzhen
Types of market efficiency The weak-form of efficiency: price accurately reflect all information that can be derived by examining market trading data such as past prices trading volume short Interest rate. etc The semi-strong form of efficiency: prices accurately reflect all public available information, including past prices. fundamental data on the firms product line quality of management, balance sheet composition, patents held, earning forecasts, accounting practice, etc The strong-form of efficiency: prices accurately reflect all information that is known by any one, including inside Information
Types of market efficiency • The weak-form of efficiency: price accurately reflect all information that can be derived by examining market trading data such as past prices, trading volume, short interest rate, etc. • The semi-strong form of efficiency: prices accurately reflect all public available information, including past prices, fundamental data on the firm’s product line, quality of management, balance sheet composition, patents held, earning forecasts, accounting practice, etc. • The strong-form of efficiency: prices accurately reflect all information that is known by any one, including inside information
Some words about market efficienc An inefficiency ought to be an exploitable opportunity. If there is nothing investors can properly exploit in a systematic way, then it is very hard to say that information is not being properly incorporated into stock prices; Richard roll Financial markets are efficient because they dont allow investors to earn above-average returns without taking above-average risk---Burton malkiel The efficient markets theory holds that the trading by investors in a free and competitive market drives security prices to the true fundamental values. the market can better assess what a stock or a bond is worth than any individual investor ---Andrei shleifer
Some words about market efficiency • An inefficiency ought to be an exploitable opportunity. If there is nothing investors can properly exploit in a systematic way, then it is very hard to say that information is not being properly incorporated into stock prices;--- Richard Roll • Financial markets are efficient because they don’t allow investors to earn above-average returns without taking above-average risk---Burton Malkiel • The efficient markets theory holds that the trading by investors in a free and competitive market drives security prices to the true “fundamental” values. The market can better assess what a stock or a bond is worth than any individual investor.---Andrei Shleifer
Info ormation arrivals and price updates The efficient market theory states that security prices reflect all currently available information One interesting empirical question is: how does the market adjust to the arrival of new information Event study methodology is one such tool to measure the economic impact of events
Information arrivals and price updates • The efficient market theory states that security prices reflect all currently available information. • One interesting empirical question is : how does the market adjust to the arrival of new information? • Event study methodology is one such tool to measure the economic impact of events
Paths to efficient prices How does information get impounded in prices If gathering information is costly can price still perfectly reflect information? If market prices deviate from their fundamental values, what bring them back? How do prices derivate from their fundamental values in the first place?
Paths to efficient prices • How does information get impounded in prices? • If gathering information is costly, can price still perfectly reflect information? • If market prices deviate from their fundamental values, what bring them back? • How do prices derivate from their fundamental values in the first place?