10 Market Efficiency

10 Market Efficiency - Market Efficiency 1 Comm367 COMM 367...

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Comm367 1 COMM 367 Market Efficiency
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Comm367 2 Meanings of Market Efficiency u Market efficiency: prices fully and instantaneously reflect all available relevant information. Price changes are independent u Market efficiency S There is no free lunch Risk/Return tradeoff There is no information available that can be used to earn returns higher than required for their risk
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Comm367 3 Rationale of Market Efficiency u Information is valuable New information changes the prospects of firms’ future cash flows Market participants analyze new information as it becomes available u Market competition – force of arbitrage Smart investors exploit any mispricing in
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Comm367 4 Weak Form u Prices reflect all past price and volume data Information in past prices or returns is not useful or relevant in achieving excess returns. Technical analysis, which relies on the past history of prices, is of little or no value in assessing future changes in price u Market adjusts or incorporates this information quickly and fully
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Comm367 5 Semi-Strong Form u Prices reflect all publicly available information Investors cannot act on new public information after its announcement and expect to earn above-average, risk-adjusted returns u Examples of publicly available information
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Comm367 6 Strong Form u Prices reflect all information, public and private No group of investors should be able to earn abnormal rates of return by using publicly and privately available information no information is secret and an individual can’t even profit from insider information.
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Comm367 7 Market Efficiency and Portfolio u A high level of market efficiency renders active portfolio management useless u Role of portfolio management in an efficient market Diversification Achieve appropriate risk level Manage taxes
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This note was uploaded on 08/03/2011 for the course ECON 503 taught by Professor Motherfucker during the Spring '11 term at Aarhus Universitet.

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10 Market Efficiency - Market Efficiency 1 Comm367 COMM 367...

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