Efficient Market Hypothesis and Predictability

Flashcards on Efficient Market Hypothesis (EMH) and Market Anomalies

Efficient Market Hypothesis (EMH)

Prices of financial assets fully and immediately reflect all available information about these assets.

Random Walks

Stock prices are random with a positive trend over time.

Weak Form Efficiency

Information contained in market trading data (past prices, volumes) is already reflected in stock prices.

Semi-strong Form Efficiency

All publicly available information (CPI, earnings forecasts) is already reflected in stock prices.

Strong Form Efficiency

All information, including inside information, is already reflected in stock prices.

Technical Analysis

Using price and volume information to predict future stock prices; related to weak-form EMH.

Fundamental Analysis

Using economic and accounting information to predict future stock prices; related to semi-strong form EMH.

Active Management

Stock picking or market timing strategies that aim to outperform the market, often seen as conflicting with EMH.

Passive Management

A well-diversified portfolio with a buy-and-hold strategy, like using index funds; aligns with EMH.

Serial Correlation

Return correlation of two consecutive periods.

Short-term Reversal

Short-term losers tend to have higher future return than short-term winners (weeks to one month).

Intermediate-horizons Momentum

Stocks exhibit a momentum property in which good or bad recent performance continues (3 to 12 months).

Long-term Reversal

Long-term losers rebound and winners fade back (3 to 5 year horizon).

Dividend Yield (Predictability of Broad Market)

Dividend Price ratio of the stock market.

Default Premium (Predictability of Broad Market)

The spread between yields on high- and low-grade corporate bonds.

Small-firm-in-January Effect

Stocks of small firms tend to have abnormal returns primarily in January.

Neglected-firm Effect

The tendency of investments in less well-known firms to generate abnormal returns.

Book-to-market Ratio (Value Premium)

Higher book-to-market ratios are associated with higher returns.

Post-Earning Announcement Drift

The phenomenon where stock prices continue to drift in the direction of an earnings surprise for some time after the announcement.