EMH Essay CJ

Question 1

What is EMH

Answer 1

Developed by Fama(1970) it states that in an efficient market asset prices reflect all available information meaning that consistently earning abnormal returns is impossible without taking on additional risk

Question 2

Weak form

Answer 2

Weak, prices reflect all past information, technical analysis pointless as returns are unpredictable.

Question 3

Semi strong

Answer 3

public info, like earnings reports. Fundamental analysis doesnt beat market with trading costs

Question 4

Strong

Answer 4

public and private info,Not even insider info would help consistently overperform

Question 5

Investor implications

Answer 5

weak - strategies based on past movements should not produce superior results
semi strong - public announcments will instantly show in stock prices
strong - unrealistic, would imply even corporate insiders cant outperform the market consistently

Question 6

Empirical support

Answer 6

Fama(1965) random walk shows stocks follow unpredictable paths due to new info.
Fama(1969) Event studies show stock prices rapidly adjusting to earnings announcments, supporting semi strong.
Jensen(1969) actively managed funds failed to outperform market predictions by CAPM

Question 7

Anomalies

Answer 7

Momentum - previous performing stocks keep doing well in the short term. Titman(1993) 3-12 months buying past winners selling past losers
Value - High btm outperform low btm, Fama and French (1992) showed that size and value factors significantly improved explanitary power of asset pricing models. Three factor model accounts for it but raises question is market truly efficient if value consitently outperforms

Question 8

Anomalies 2

Answer 8

January effect - small cap high returns, Roezeff (1976) against weak form efficiency as people can use past years info to then time investments around the calendar year
Lagged variables - Regressions like dividend yield, default and term spread to predict future movement. Unpredictablilty doubts so undermines weak form

Question 9

Fama(1998) argument anomalies

Answer 9

Fragile, fail to persist over rime, markets and methodologies. Several dissapear when tested in different samples. Momentum effect disperses when in international markets or time periods.

Question 10

Joint Hypothesis Problem

Answer 10

Tests of market inefficiency are always conditional on the asset pricing model used. If the test finds an anomaly could mean inefficient market or model is misspecified.

Question 11

Fama (2023) Further argument

Answer 11

Anomolies often arise due to data mining or selection bias. Jensen(2023) compliments this by reviewing hundreds of anomolies and conclude that most lack robustness or economic significance.

Question 12

Overall findings

Answer 12

Suggest a nuanced view, anomalies can exist but are often context dependant, market generally efficient. Anomalies are often short lived with limited profit opportunities after costs.