Chapter 3 Market Efficiency

Chapter 3
MARKET EFFICIENCY
Presented by:
MARLYN R. LEBANTINO
MARIAN MARIEZ B. PACIO
TOPICS
 Concepts of Market Efficiency

 3 Types of Market Efficiency
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MARKET EFFICIENCY
means that the price which investor
is paying for financial asset (stock,
bond, other security) fully reflects
fair or true information about the
intrinsic value of this specific asset
or fairly describe the value of the
company – the issuer of this
security.
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TYPES OF INFORMATION
Market Data or Security Market Information

- is the broad term used in reference to the financial information necessary for
carrying out research, analyzing, trading and accounting for financial instruments of
all asset classes on world markets.
Public Information
- means any information, regardless of form or format, that an agency discloses,
disseminates, or makes available to the public.
Non-Public or Private Information

- refers to corporate news or information that has not yet been made public and which
could also have an impact on its share price.
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IN PERFECTLY EFFICIENT MARKETS
 Market Value = Intrinsic Value
 Use Passive Investment Strategy (Avoid Active
Strategy)
 Only Unexpected Information Impacts Security Prices
ONE MEASURE OF EFFICIENCY is time lag

from information to change in security price.
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FACTORS AFFECTING MARKET EFFICIENCY
1. Number of Market Participants – the higher the participants, the higher the
efficiency
2. Availability of Information – if information is available to all relevant parties,
there is high efficiency
3. Limits to Trading - the maximum price range limit that an exchange-traded security
is allowed to fluctuate in one trading session. If there are high limits to trading, then the
market efficiency if low.
4. Transaction Costs - the prices paid to trade a security, such as a broker's fee and
spreads, or to make any trade in a market. If transaction cost is high, then the market
efficiency if low.
5. Information Costs - expenditures of time and money that are required to obtain
information. If information cost is high, then the market efficiency if low. 6
IMPORTANT TERMS IN MARKET EFFICIENCY
Fundamental Analysis
- refers to analyzing financial aspects of a business like
financial statements and financial ratios and other factors
like economics and others affecting the business to
analyze the fair market value of its share/security.
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Technical Analysis
- refers to the analysis of share/security fair price by
examining and analyzing the past trends and changes in
the price of shares and studying the business’s historical
information.
8
Abnormal Trading Profits

- describes the unusually large profits or losses generated by
a given investment or portfolio over a specified period. The
abnormal return is calculated by subtracting the expected
return from the realized return and may be positive or negative.
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THREE FORMS OF MARKET
EFFICIENCY
• Weak Form of Efficiency
• Semi – strong Efficiency
• Strong Form of the efficiency
WEAK FORM OF EFFICIENCY
stock prices are assumed to reflect any information that may be
contained in the past history of the stock prices.
EFFECT:
No one investor or any group of investors should be able to earn over the
defined period of time abnormal rates of return by using information about
historical prices available for them and by using technical analysis. Prices will
respond to news, but if this news is random then price changes will also be
random.
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SEMI – STRONG FORM OF EFFICIENCY
all publicly available information is presumed to be reflected in stocks’ prices. This
information includes information in the stock price series as well as information in
the firm’s financial reports, the reports of competing firms, announced information
relating to the state of the economy and any other publicly available information,
relevant to the valuation of the firm.
EFFECT:
No one investor or any group of investors should be able to earn over the defined
period of time abnormal rates of return by using information about historical prices
and publicly available fundamental information (such as financial statements) and
fundamental analysis.
12
STRONG FORM OF EFFICIENCY
which asserts that stock prices fully reflect all information,
including private or inside information, as well as that which is
publicly available. This form takes the notion of market efficiency
to the ultimate extreme. Under this form of market efficiency
securities’ prices quickly adjust to reflect both the inside and public
information.
EFFECT:
No one investor or any group of investors should be able to earn over the defined
period of time abnormal rates of return by using all information available for them.
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Thank You for Listening!
Presented by:
MARLYN R. LEBANTINO
References:
https://www.investopedia.com ›
https://www.youtube.com/watch/CFA Level I Market Efficiency Video Lecture by Mr. Arif Irfanullah Part 1
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Chapter 3

 Concepts of Market Efficiency

Market Data or Security Market Information

Non-Public or Private Information

ONE MEASURE OF EFFICIENCY is time lag

Abnormal Trading Profits

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