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To What Extent are Stock Market Anomalies Evidence of Market Inefficiency?
Finance & Accounting
Pages 8 (2008 words)
To what extent is stock market anomalies evidence of market inefficiency? Table of Contents Introduction 3 Inferences from long term returns 4 Problems related to modelling 4 Econometric Forecasting 4 Reliability of individual studies 5 IPO’s and SEO’s 5 Stock Split 6 Conclusion 7 References 8 Introduction Depending on the seasonality of the stock markets the deviation from the efficient market theory was analysed by Eugene Fama (1970, 1991).
Eugene Fama has taken the specific asset pricing model such as the APT (Asset Pricing Theory and the CAPM (Capital Asset Prising Model) as the standard paradigm. Since the stock prices of different firm over the markets is different, i.e. the market value for the riskier stocks are low providing higher rate of return and vice-versa but in a cross section market the inverse will be applicable. Thus based on the evaluation made by Fama we can analyse the factors responsible for the stock markets anomalies resulting from market inefficiency (Keim & Ziemba, 2000, pp.92-94) Momentum and Overreaction anomalies Through momentum of anomalies the short-term pattern of share pricing of the companies. According to the theory lead by Werner DeBondht and Richard Thaler the over reaction of investors to the public information is completely unnecessary as the stock prices are evaluated according to the past performance of the stock market which may not portray the true picture of the market information. Thus the stock prices with inflated or depressed pricing may result in realising good or bad information which cannot be depended upon. ...
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