Anomalies

Anomalies - FINA537 Equity Valuation Professor Laura...

Info iconThis preview shows pages 1–11. Sign up to view the full content.

View Full Document Right Arrow Icon
1 FINA537 Equity Valuation Professor Laura Xiaolei Liu Market Efficiency and Trading Strategies
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Capital Market Efficiency • An efficient capital market is a capital market that efficiently processes information ¾ Prices reflect rational and unbiased valuations based on all available information ¾ It is not possible to make abnormal profits from trading on publicly available information • Behavioral finance argue that assets price may deviate from the fundament due to irrational traders
Background image of page 2
3 Capital Market Efficiency • True or false? ¾ Efficient market means market price always reflect fundamental value/underlying value ¾ If market is efficient, no investors will beat the market in the long run (say 10 years in a row) • What is your best investment decision if market is efficient
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 Key points of market efficiency • Market efficiency: No arbitrage ¾ Friedman (1953): if Ford’s fundamental value is $20 and irrational traders are pessimistic and push price to $15, what do you do? •B e h a v i o r : ¾ short sale constrain ¾ How long does it take for the price to correct
Background image of page 4
5 Implications from the debate • Market efficiency: ¾ “invisible hand” ¾ Free market leads to efficiency ¾ Less government intervene • Behavior: We need big government since market may go wrong sometimes
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 Definition of Market Efficiency • Weak form efficiency ¾ It is not possible to make abnormal trading profits based on information in past stock prices or past stock price changes ¾ Investors who believe that the market is not weak form efficient are called technical analysts . Technical analysts make investment decisions based on technical indicators that are calculated from past stock prices
Background image of page 6
7 Autocorrelations of Returns • If stock return’s autocorrelation is zero market is weak form efficient • Suppose autocorrelations were position. What can you do? • Suppose autocorrelations were negative. What can you do?
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
8 Definition of Market Efficiency • Semi-strong form efficiency ¾ It is not possible to make abnormal trading profits based on any publicly available information • There is a large body of literature in finance that uses a technique called an “event study.” Event studies examine how stock prices respond to new public information
Background image of page 8
9 Definition of Market Efficiency • Strong-form efficiency ¾ It is not possible to make abnormal trading profits base on any information, public or private • There is plenty of evidence that financial markets are not strong-form efficient ¾ Corporate insiders are earnings abnormal trading profits.
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
10 What is the correct benchmark for “Beating the Market”? • A high stock return (relative to other stocks) does not immediately imply you are getting a “free lunch” or an arbitrage opportunity exists!
Background image of page 10
Image of page 11
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 49

Anomalies - FINA537 Equity Valuation Professor Laura...

This preview shows document pages 1 - 11. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online