In this video we will take a look at the concept of market efficiency and the three forms of market efficiency. Market efficiency is a very important concept for a portfolio manager. Market efficiency, a concept derived from the Efficient Market Hypothesis, suggests that the price of a security reflects all the information available about […]
Market Efficiency L1
An Overview of Efficient Markets
A wind vane that moves with the slightest movement in breeze is a good representation of an efficient market. A market that quickly accepts and integrates any new information related to assets is called an informationally efficient market or efficient market. In an ideal efficient market the asset price will reflect all past and present […]
Market Efficiency: Influencers
Efficient markets assimilate information that gets reflected in trades. Any new information in efficient markets is adjusted quickly. In reality most markets are neither fully efficient nor fully inefficient. They demonstrate various degrees of efficiency along a continuum between the opposing points of efficiency and inefficiency. The asset prices better reflect information more quickly and […]
Types of Efficient Markets
Eugene Fama in 1970 introduced the forms of efficient markets in the Journal of Finance. Titled “Efficient Capital Markets: A Review of Theory and Empirical Work”, this seminal article outlines the capital markets. He states markets function in three formats: Weak Semi-strong Strong The forms are described with respect to available information that is reflected […]
Pricing Anomalies: Calendar, Momentum and Overreaction Anomalies
Efficient markets reflect any new information in the prices of the securities that are traded. However, there are from time to time anomalies in the system that leads to a mispricing of the securities. They are not one off phenomenon but a persistent pattern that buckles the tenants of an efficient market system. For an […]
Pricing Anomalies: Cross Sectional Anomalies
Cross sectional anomalies can be categorized into two groups, namely, Value Effect and Size Effect. Value Effect Several studies in markets across the world have yielded the following results. Stocks with below average price-to-earnings and market-to-book ratios have consistently outperformed growth stocks over a period of time. This is a contradiction of the semi-strong efficient […]
An Overview of Behavioral Finance
‘Man is a rational being’ is a hypothesis that has been proved wrong several times over. Each person has their individual rationale in what they do and this is true in the sphere of investing as well. Referred to as cognitive biases the subject of behavioral finance attempts to understand how these biases affect investment […]