Market Efficiency - Chapter 10 The pricing efficiency of...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 10 The pricing efficiency of capital markets 1
Background image of page 1

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

View Full DocumentRight Arrow Icon
Table of Contents 1. Market efficiency theory 1.1 Definition of market efficiency 1.2 What keeps security prices efficient? 1.3 Levels of market efficiency 2. Tests of the efficiency of the Australian Stock Exchange 2.1 Is the ASX weak form efficient? 2.1.1 Are mechanical trading rules profitable on the ASX? 2.2 Is the ASX semi strong form efficient? 2.2.1 Do stock prices on the ASX react rapidly to information? 2.2.2 Do stock prices on the ASX react rapidly to large trades? 2.3 Is the ASX strong form efficient? 2.3.1 Evidence against the Efficient Markets Hypothesis–A final word
Background image of page 2
Overview In this lecture we will: Outline the theory of market efficiency Define the term ‘ market efficiency Explain how markets are kept efficient Discuss different possible levels of market efficiency Examine tests of the efficiency of the ASX Review relevant research published in academic journals 3
Background image of page 3

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

View Full DocumentRight Arrow Icon
1. Market efficiency theory 1.1 Definition of Market efficiency informational efficiency which is concerned with how rapidly security prices reflect or impound new information that arrives to the market Weak, semi strong and strong form Allocational efficiency is where economic resources are allocated in terms of opportunity cost 4
Background image of page 4
Eugene Fama (University of Chicago) defines market efficiency as an ‘hypothesis’: “…THE SIMPLE STATEMENT THAT SECURITY PRICES FULLY REFLECT ALL AVAILABLE INFORMATION” The Oxford English Dictionary defines ‘hypothesis’ as: “…A PROVISIONAL SUPPOSITION FROM WHICH TO DRAW CONCLUSIONS… WHICH SERVES AS A STARTING POINT FOR FURTHER INVESTIGATION BY WHICH IT MAY BE PROVED OR DISPROVED…” But how are security prices kept efficient? 5 1.1 Definition of Market efficiency
Background image of page 5

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

View Full DocumentRight Arrow Icon
1.2 What keeps security prices efficient? Case Study At around 1.05pm on 30 August 2005, Tabcorp Holdings released a preliminary final report This information was used by investors to revise (upward) the cash flows forecast for Tabcorp, resulting in a permanent upward revision of the fair value of Tabcorp The price of Tabcorp shares rose from: $16.29 at 1.00pm to $16.64 at 1.30pm 6
Background image of page 6
The price of Tabcorp against the ASX200 on 30/8/05 13.50 10.40 15.00 14.10 13.00 4445.0 4440.0 4435.0 4430.0 4425.0 4420.0 4415.0 4410.0 4405.0 4000.0 4395.0 4390.0 Index value TAH ASX200 15.90 16.00 16.10 16.20 16.30 16.40 16.50 16.60 16.70 16.80 Price ($) 10.00 10.10 10.20 10.30 10.50 11.00 11.10 11.20 11.30 11.40 11.50 12.00 12.10 12.20 12.30 12.40 12.50 13.10 13.20 13.30 13.40 14.00 14.20 14.30 14.40 14.50 15.10 15.20 15.30 15.40 15.50 16.00 16.10 Time FIGURE 10.1 7 1.2 What keeps security prices efficient?
Background image of page 7

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

View Full DocumentRight Arrow Icon
If all market players had accurately predicted the content of the earnings release prior to 1.05pm: There would have been large buying pressure in Tabcorp Holdings This would have pushed the price up
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 39

Market Efficiency - Chapter 10 The pricing efficiency of...

This preview shows document pages 1 - 9. Sign up to view the full document.

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