Lecture 9 Market Efficiency Flashcards Preview

Behavioural Finance and Real Estate > Lecture 9 Market Efficiency > Flashcards

Flashcards in Lecture 9 Market Efficiency Deck (22)
Loading flashcards...
1
Q

What are the two standard assumptions of the Traditional Finance Theory?

A

Standard assumptions:
- Investors and managers resemble the Homo Economicus
- Markets are perfect and informationally efficient

2
Q

Efficient Market

A

A market in which prices always “fully reflect” available information

3
Q

Out of which two efficiencies exists Informational efficiency?

A

Allocative efficiency
Operational efficiency

4
Q

How does the price adjustment of new information imply of the EMH?

A

Price adjustments after the arrival of new information are immediate and correct

5
Q

What are the two interpretations of the EMH then?

A

Prices reflect fundamental values
It is not possible to systematically achieve abnormal returns

6
Q

Arbitrage

A

The strategy of buying something in one place and selling it in another place at the same time, in order to make a profit from the difference in price.

7
Q

What do EMH proponents do when there is mispricing?

A

Arbitrageurs buy and sell the same or essentially similar securities at advantageously different prices and as a result push prices back to their fundamental value.

8
Q

What are three limits to Arbitrage?

A

Fundamental risk
Noise Trader risk
Implementation issues

9
Q

What entails fundamental risk?

A

Substitute securities are rarely perfect

10
Q

What entails Noise trader risk?

A

Mispricing may increase and force liquidation

11
Q

What entails the implementation issues?

A

Transaction costs (commission, tax, bid-ask spread, price impact)
Short-sale constraints (regulation, fees, lacking stock lending supply)
Information costs (detecting)
Resources (money, collateral)

12
Q

What is the one-way statement of the free lunch?

A

Prices are right is no free lunch, but no free lunch doesn’t mean prices are right

13
Q

How can you test if price is right?

A

Law of one price - identical assets should have identical prices

14
Q

rights issue

A

Issue of rights to a company’s existing shareholders to buy a proportional number of additional shares at a given price within a fixed period.
- Rights are mostly tradable
- Deep discount for distressed firms

15
Q

What are advantages of rights issues relative to conventional issues?

A
  • No wealth transfer to new shareholders
    -Higher success rate
  • Lower issue costs (less marketing efforts)
16
Q

What is the disadvantage of rights issue relative to conventional issues?

A

Signal of urgency

17
Q

Which two components does the joint-hypothesis problem have?

A

Informational efficiency of the market
Asset pricing model specification

18
Q

What are the three forms of efficiency and what do they entail (Fama 1970)?

A

Weak - Historical trading info -Technical analysis
Semi-strong - public info - Fundamental analysis
strong - Insider info - Insider trading

19
Q

Inter-Dependency of the three forms of efficiency

A

A circle within a circle within a circle called from in to out: weak - semistrong - strong form

20
Q

Anomaly

A

Deviation from an established rule

21
Q

What is the Anomaly in Finance?

A

Market Inefficiency

22
Q

A bubble

A

A bubble is an upward price movement over an extended period that then implodes