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UnderstandingMarketEfficiency

UnderstandingMarketEfficiency - Understanding Market...

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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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