Lecture7 - • Evidence using tests based on trading rules...

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1 Market efficiency Definition An efficient market is one in which prices reflect all available information
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2 Why worry about efficiency? Prices are signals which determine resource allocation in a market economy Efficient prices are hi-fidelity signals of quality For allocations to be “optimal” the prices should be efficient
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3 3 forms of the EMH Weak form …prices reflect information contained in past prices Semi-strong form …prices reflect all public information Strong form …prices reflect all information including insider information
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4 The implications of market efficiency If the markets are weak-form efficient: price changes (returns) should be uncorrelated future prices cannot be predicted using information contained in past prices technical trading rules should not be profitable
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Unformatted text preview: • Evidence using tests based on trading rules and return autocorrelations is largely supportive of the weak form of the EMH 5 The implications of market efficiency(cont’d) • If markets are semi-strong form efficient, then – One should not be able to earn abnormal returns using public information such as • earnings announcements • publicly available financial information • product announcements, etc. • The evidence is generally supportive of the semi-strong form of the EMH 6 The implications of market efficiency(cont’d) • If markets were strong form efficient, then – Even insiders would not be able to earn abnormal returns • The evidence clearly indicates otherwise: – insiders do earn abnormal returns – hence the need for insider trading regulation...
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Lecture7 - • Evidence using tests based on trading rules...

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