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. Through the implementation of the overreaction strategy the investors were suggested to buy the “loser” portfolios while selling off the “winner” portfolios. But again a contradiction arises related to the weak-form of efficiency of the securities tends to earn high returns not only in the short-term but also in the subsequent periods. However the existence of the momentum is rational not contradicting the market efficiency due to the fact that that the presence of shocks in the growth rates of the cash flows of the shareholders which is induced to the serial correlation that is not only short lived but also rational (McMillan, et al., 2011, p.contents). Inferences from long term returns According to the inferences drawn by Fama is that the market efficiency of the market is based on the joint model testing for the expected normal returns. The problem that arises with the expected normal return whose description provided for the systematic pattern is incomplete related to the average returns during the testing period resulting in a bad-model problem. A bad model problem results in spurious average abnormal return which tends to become the CARs (Cumulative Abnormal Returns) because of the mean associated with the CAR increases summing to the standard error. Constant pricing errors can be seen in the ARRs (Average of monthly abnormal returns) with the respective standard error. Bad modelling problems are the main reason behind the long-term buy and hold abnormal returns which results in the multiplication of the expected return problem related to the short-term return explanation. Problems related to modelling The problems related to the modelling of the bad-model are of two types; the first is that the asset pricing model of any kind does not completely describe the expected return from the market. In a particular market is tilted towards the small stocks then in the calculation of the CAPM the risk adjustments made can project false returns. Even in the case of the true model where the deviation from the model are predicted a situation of spurious anomaly can arise after the risk adjustmen
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)…
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therefore according to the efficiency market hypothesis, there is no investor who has any form of advantage in foretelling the expected return on the security prices since there is no investor who has access to the public information or private information that is not yet available to any other investor.
Name: Instructor: Course: Date: Stock market summary essay Introduction This essay seeks to relay to the reader a comprehensive summary of a stock market case. The case involves an investor who has $1 million and seeks to invest in various stocks of his choice.
The stock market can be very profitable but can also lead to losses. The stock market is very profitable creating a lot of interest to many people and though it may result in losses, there is a lot of benefit to the institutions selling their stocks, the individual that buy it and the governments of the various countries, making it one of the most popular earners.
The stocks were exchanged by the unofficial and unlicensed trade offices. The stock market was still not full-fledged developed but trading of shares was started by the unofficial proceedings. In the deficiency of suitable mechanisms, transparency and controls, the element of fairness was absent.
Commodities are traded in commodities markets, with derivatives are traded in a diversity of markets. The size of the worldwide 'bond market' is estimated at $45 trillion. The size of the 'stock market' is estimated at about $51 trillion. The world derivatives market has been estimated at about $480 trillion 'face' or nominal value, 30 times the size of the U.S.
But even if the anomalies existed in the sample period in which they were first identified, the activities of practitioners who implement strategies to take advantage of anomalous behavior can cause the anomalies to disappear (as research findings cause the market to become more efficient)."
Indeed, there were several theories and models develop to further increase the understanding on financial markets. The knowledge, however, is subject to various criticisms and judgement. Such process allows the models and theories to be meticulously developed before being accepted.
If a person uses such information to buy or sell a company’s shares in the stock market this could amount to insider trading and which is a highly prosecutable criminal offence in the UK. (moneyextra.com, 2007)
For fair treatment of