What is an efficient market?
A market in which security prices just rapidly to reflect any new information (i.e. reflects all past and present information)
What information does the weak form of market efficiency reflect?
Past market data
What information does the semi-strong form of market efficiency reflect?
Past market data and public info
What information does the strong form of market efficiency reflect?
Past market data, public info and private info
If something support the stronger form of EMH, does it also support weaker forms?
yes
If something violates the stronger forms, does it also violate weaker forms?
not necessarily. However, if it violates weaker forms, it does violate stronger forms
Name (3) evidences supporting the weak form of EMH
- Random walk model
- With scatter plot, no distinct pattern, autocorrelation coefficient of 0
- Variance is approximately equal to the number of periods
Name (1) evidences supporting the semi-strong form of EMH
-3 months prior to a takeover announcement, the stock price gradually increased. At the time of the announcement, stock price instantaneously jumped. After the announcement, the abnormal returns dropped to zero.
Abnormal return = Actual Return-Expected Return
where
Expected return = alpha + beta * Market Return
Name (2) evidences supporting the strong form of EMH
- Top performing fund managers in one year only have a 50% chance to beat their reference index the following year
- The performance of actively managed mutual funds from 1971 to 2013 only beat Wilshire 5000 index 40% of the time
Name (3) Calendar/Time anomalies
- January effect
- Monday effect
- Time-of-day effect (more volatile during opening and closing hours)
Name (4) Overreaction/underreaction anomalies
- New-issue/IPO puzzle
- Earnings announcement puzzle
- Momentum effect
- Reversal effect (negative serial correlations when investors overreact)
