Efficient+Capital+Markets+II +Oktavia

8/13/2019 Efficient+Capital+Markets+II +Oktavia

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OUTLINE

The Theme

The Main Areas of Research

Return Predictability: Time-VaryingExpected Returns

Cross-Sectional Return Predictability

Event Studies Tests for Private Information

Conclusions


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The Theme

Market efficiency hypothesis:

Security prices fully reflect all available

information (Fama, 1991) Prices reflect information to the pointwhere the marginal benefits of acting oninformation (the profit to be made) donot exceed the marginal costs (Jensen,1978)


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The Theme.. Contd

Does the fact that market efficiencymust be tested jointly with anequilibrium-pricing model make empiricalresearch work on efficiencyuninteresting?

Does the joint hypothesis problem make

empirical work on asset-pricing modelsuninteresting?


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The Theme.. Contd

Fama answer is:

an unequivocal no


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The Main Areas of Research

Three categories of market efficiency:

1.Weak-form

2.Semi-strong-form

3.Strong-form


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The Main Areas of ResearchContd

Past test

Weak-form :

Only use pastreturns

Recent test

Includes variableslike: dividend yieldsand interest rates


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Semi-Strong-Form:

Test of adjustmentof prices to publicannouncements

Recent test

Event studies

Past test


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Past test

Strong-form:

Tests of whetherspecific investorshave information not

in market price

Recent test

Tests for privateinformation


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Return Predictability: Time-VaryingExpected Returns

A. Past Returns

1. Short-Horizon Returns

2. Long-Horizon Returns3. The Constrarians


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B. Other Forecasting

1. The Evidence

2. Market Efficiency3. A Caveat


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C. Volatility Tests and Seasonals inReturns

1. Volatility Tests

2. Return Seasonality


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Cross-Sectional ReturnPredictability

Asset-pricing model:

1. Sharpe-Lintner-Black (SLB) Model

2. Multifactor Models3. Consumption-Based Asset-Pricing

Models


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Cross-Sectional ReturnPredictability .. Contd

Where Do We Stand ???

The Bad News

The Good News


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Event Studies

A.Some of the Main Results

B. Market Efficiency


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Test for Private Information

A. Insider Trading

B. Security Analysis

C. Professional Portfolio Management


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Conclusions

A. Event StudiesThe cleanest evidence on market-efficiencycomes from event studies, especially event studieson daily returns.

average stock prices adjust quickly to informationabout investment decision, dividend changes,changes in capital structure, and corporate

control transactions.Prices adjust efficiently to firm-specificinformation


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B. Private Information

Unlike event studies, however, evaluating the

access of investment managers to privateinformation involves measuring abnormalreturns over long periods

Now, performance measurement relative topassive benchmarks is the rule, and there arefirms that specialize in evaluatingprofessional managers

The data generated by these firms are aresource for tests for private informationthat academics have hardly tapped


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C. Return Predictability

The new research produces precise

evidence on the predictability of dailyand weekly returns from past returns,but the results are similar to those in

the early work, and somewhat lacking indrama.

The new research on the predictability

of long horizon stock returns from pastreturns is high on drama but short onprecision


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To know more about the links betweenexpected returns and the macro-

variables, the task has at least two parts:1. If the variation in expected returns

traces to shocks to tastes or technology,

then the variation in expected returnsshould be common across differentsecurities and markets

2. The second interesting task is to digdeeper and establish links betweenexpected returns and business

conditions


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End of Session

Thank You

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