Efficient Market Hypothesis Flashcards
(40 cards)
What is an efficient market?
An efficient market is one in which asset prices fully reflect all available information.
What is an inefficient market?
An inefficient market is one where asset prices reflect some available information but not all.
Who and when was the EMH introduced?
Introduced by Eugene Fama in the 1960s.
What is the general purpose of the EMH?
It is a hypothesis and doesn’t reflect reality. Simply a lens used to understand how markets process information.
What are the foundations of market efficiency?
Investor rationality, independent deviations from rationality, and arbitrage.
What is investor rationality?
Investors react rationally to all new information.
What are independent deviations from rationality?
Not everyone is rational, but mistakes are random and cancel out.
What is arbitrage?
Smart traders correct pricing mistakes made by irrational investors.
What factors affect market efficiency?
The number of market participants, information availability and financial disclosure, limits to trading, transaction costs, and information acquisition costs.
What are the 3 types of market efficiency?
Weak form, semi-strong form, and strong form.
What is weak form market efficiency?
Current stock prices fully reflect all information contained in past trading data.
What is semi-strong form market efficiency?
Current stock prices fully reflect all publicly available information, such as past information, financial statements, and media coverage.
What is the implication of semi-strong form market efficiency?
Investors can’t consistently beat the market using fundamental analysis or public news because prices adjust almost instantly.
What is strong form market efficiency?
Current stock prices fully reflect all information, both public and private. Assumes perfect markets where all info is cost-free and available to everyone at the same time.
What are the implications of strong form market efficiency?
No one, not even company insiders, can consistently earn abnormal profits by trading on any kind of info.
What is the question researchers want to test in weak form?
Are changes in stock prices random and do past prices help predict future prices?
What does autocorrelation measure in weak form research?
Measures whether today’s stock return is related to past returns. A small or near-zero autocorrelation means no meaningful relationship.
What are the names and dates of studies supporting weak form research?
Fama (1965) and Hillier et al. (2020).
What is a study against weak form research?
Claessens, Dasgupta and Glen (1995).
What did Fama (1965) find in weak form research?
Most autocorrelation coefficients were very close to zero, suggesting little to no predictable patterns from past returns.
What did Hillier et al. (2020) find in weak form research?
Most values are very close to zero, meaning no consistent relationship between past and future returns.
What did Claessens, Dasgupta and Glen (1995) find in weak form research?
Found higher autocorrelation in emerging markets than in developed markets, suggesting weak form efficiency holds better in developed markets.
What is the first question researchers want to test in semi-strong form?
Does the market quickly and accurately respond to new info?
What are the names and dates of studies supporting semi-strong form research?
Patell and Wolfson (1984) and Kruger (2015).
