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Morente <> 2 — CHAPTER 4: Capital Market Effi 44 tntraducion ney ip ag cry he mat nig ee 121 tearm Maret tery 422 Samistrang art ney Options + 9% EZ reewidh [Draven | AP padatad Addr ‘Sgt ann paneer wt ge 123 Srenp tet tency 443 eparturas trom te EMH eaany aerate pr coe = + DH Eitrowith M roevn | AM med B Atd ees [Akerative preseptions about the behviou of markats are widely dlscusced these days: Most of these prescritons are based onthe rationality ofthe markets in ther processing the information related to an event or based on based investor preferences For instance, if the investors onan average are overconfident about her investment ably, they would not ay clase attention to naw price rlevant information tht arises inthe market Tis leads to inadequste price reponse tothe information event and peal continustion ofthe tend ue tothe unde reaction. Ths basin processing information iz aimed tobe the cause of price ‘momentum, Based investor preferences include aversion tothe rel ina stock, This again would lead to under reaction. ‘The market effceny lnm wa based onthe assumption that irtionsl (ined) investors ‘woul be exloted by the rational traders, and would eventually lose out inthe market, leading tothe ent. Therefore, even inthe presence of based adersthe market wae expected te evelve as efficient. However, more recent evidence suggest that the iatonal traders ere tek exiting the market a exacted, instead ot many instances they eppear to make profs at ‘he expance of the rational traders, Some ef the wel-known anamais—ordepertures lm market lfiency~are calendar elects like the Januory eect and various day-fthe-wesk effets and the so-called size effec. The January eect wire documented inthe US markets~stock returns were fund tobe higher in January than in any ether month, Since then, thas baen empirically tested ina numberof Intemational markets, Ike Tekyo, London, and Pars among others. While the evidence has een mixed, the fect that exits imple persistent deviation from mathe ffency. ‘Stock returns are generally expected tobe independent across weekdays, but a number of studies have found returns on Mandey tbe lower than inthe rest af the weak One ofthe reasons put forward to exlan this anomaly s that etums on Monday oe expected to be ferent, given tht they are across Fay-endto-Mondy-morning,» much longer period thon anyother dy, and hens with moe information. Thi why thie departure frm market ficlncy i also sometimes called the weekend eet “The alternative prescriptions about the behaviour of markets bared on various sources and a ®