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

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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(contd) 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(contd) 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 and...

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