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Unformatted text preview: Understanding Market Efficiency 1 Definitions of Market Efficiency: • Weak form Prices reflect all information available in past prices. • Semi-strong form Prices reflect all public information. • Strong form Prices reflect all private information. Note: Markets are strong-form efficient → markets are semi-strong form efficient → markets are weak-form efficient. Tests of Market Efficiency: One of the main ways market efficiency is tested is using event studies . Event studies look at the pattern of prices and returns around a public event (e.g. cuts in dividend payouts, announcements of stock buy-backs, positive or negative earnings surprises). Almost all studies have found that the market’s response to news has the following pattern: • A sudden drop or rise in the stock price on the announcement. • Comparatively little movement in prices in the days following the announcement • Occaisonally there is drift in the “right” direction prior to the announcement....
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- Fall '09