Lecture

Efficient Markets: Anomalies and Arbitrage

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In course

FIN-405: Investments

The course covers a wide range of topics in investment analysis ...

Description

This lecture explores the concept of market efficiency, different forms of efficient market hypotheses, and empirical evidence supporting them. It delves into event studies, cross-sectional anomalies, and the impact of market news on stock prices. The lecture also covers the Efficient Markets Hypothesis (EMH), behavioral finance, and the Black-Litterman model. It discusses the factors influencing stock returns, such as size and value anomalies, and the implications for portfolio construction. Additionally, it examines mutual fund performance, market predictability, and the role of transaction costs in trading strategies.

Instructor

Pierre Collin-Dufresne

Official source

Ontological neighbourhood

Business

Finance: Investment management

Economics

Microeconomics: Financial economics

Related concepts (32)

Market anomaly

A market anomaly in a financial market is predictability that seems to be inconsistent with (typically risk-based) theories of asset prices. Standard theories include the capital asset pricing model and the Fama-French Three Factor Model, but a lack of agreement among academics about the proper theory leads many to refer to anomalies without a reference to a benchmark theory (Daniel and Hirschleifer 2015 and Barberis 2018, for example). Indeed, many academics simply refer to anomalies as "return predictors", avoiding the problem of defining a benchmark theory.

PDF

Portable Document Format (PDF), standardized as ISO 32000, is a developed by Adobe in 1992 to present documents, including text formatting and images, in a manner independent of application software, hardware, and operating systems. Based on the PostScript language, each PDF file encapsulates a complete description of a fixed-layout flat document, including the text, fonts, vector graphics, and other information needed to display it. PDF has its roots in "The Camelot Project" initiated by Adobe co-founder John Warnock in 1991.

Adaptive market hypothesis

The adaptive market hypothesis, as proposed by Andrew Lo, is an attempt to reconcile economic theories based on the efficient market hypothesis (which implies that markets are efficient) with behavioral economics, by applying the principles of evolution to financial interactions: competition, adaptation, and natural selection. This view is part of a larger school of thought known as Evolutionary Economics. Under this approach, the traditional models of modern financial economics can coexist with behavioral models.

Adobe Acrobat

Adobe Acrobat is a family of application software and Web services developed by Adobe Inc. to view, create, manipulate, print and manage Portable Document Format (PDF) files. The family comprises Acrobat Reader (formerly Reader), Acrobat (formerly Exchange) and Acrobat.com. The basic Acrobat Reader, available for several desktop and mobile platforms, is freeware; it supports viewing, printing, scaling or resizing and annotating of PDF files. Additional, "Premium", services are available on paid subscription.

Stock market bubble

A stock market bubble is a type of economic bubble taking place in stock markets when market participants drive stock prices above their value in relation to some system of stock valuation. Behavioral finance theory attributes stock market bubbles to cognitive biases that lead to groupthink and herd behavior. Bubbles occur not only in real-world markets, with their inherent uncertainty and noise, but also in highly predictable experimental markets.

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Explores factor models in finance, covering mean-variance portfolios, size and value anomalies, and momentum strategies.

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Related concepts (32)

Market anomaly

PDF

Adaptive market hypothesis

Adobe Acrobat

Stock market bubble