The Theory of Stock Market Efficiency: Markets are not perfect but pretty tough! Research and the idea of market efficiency have come a long ways in past 30 years. Many of the reported anomalies could be the result of mismeasurements and the failure to incorporate time-varying risks and returns as well as the cost of information. The basic idea underlying market efficiency is that competition will drive all information into the price quickly.

Ray Ball on Market Efficiency – Finance Professor

These papers helped remove the generally prevailing view that market prices were noisy estimates that could not be trusted let alone used as a means of academic research. The more theoretical models of Modigliani and Miller, Sharpe and Lintner CAPM , and Black and Scholes helped this idea that markets were efficient gain support. Likewise the other models added credibility to the event-study findings.

Ball, while still advocating the efficiency of the market, acknowledges several limitations that were found as researchers poured over the date looking for anomalies.

This is possibly the strongest part of the paper The basic idea is that we assume information costs to be zero when in fact they are positive.

Everyone recognizes that these costs should be incorporated into any efficiency finding, but as we do not know these costs, we assume them to be zero. Further, even if there are anomalies that researchers find, why publish them?

Environment: News & features

If true anomalies, and not data quirks, then why not trade on the information? Publishing implies the benefit of this information is not great.

The fact that researchers can not detect abnormal gains is not surprising. Ball also points out the obvious: Ball also points out that analysts may play an important role in reducing uncertainty by reporting on what other investors are doing and how they feel about the firm.

Changes in Risk even seasonal if firms typically announce major events on Monday or in December etc. As a result, we can not say much definitively. The issue will be impossible to solve conclusively while there are so many binding limitations to the asset pricing models that underlie empirical tests of market efficiency.

Your email address will not be published. Finance Professor Bringing the real world to the class room and vice versa! FinanceProfessor Home About FinanceProfessor Notes for classes LeaseNotes What is finance?

Very basic introduction to EMH Interested in Interest rates? WACC Test Questions What to expect from a test Finance Classes Finance Finance SIMM-Students in Money Management Fin Behavioral Finance MBA Mainpage Blog Academic Paper Summary. Recent Posts Retirement —The Basic theory Hello world! Recent Comments Mr WordPress on Hello world!

Page not found - Rexburg HousingRexburg Housing

Archives November August Meta Log in Entries RSS Comments RSS WordPress. Ray Ball on Market Efficiency The Theory of Stock Market Efficiency: Related articles Nobel Prize Winner Eugene Fama Explains Why You Have No Chance Of Beating The Market Efficient Capital Markets Part II Efficient Markets Rock!!! Leave a comment Cancel reply Your email address will not be published. Latest Posts Retirement —The Basic theory Hello world!