Semi-strong form EMH:
· Security prices reflect all publicly-available information.
· stocks adjust quickly to absorb new information.
· Fundamental analysis cannot generate excess returns either
Tests:
Event test
Given the assumption that the market is reflective of all publicly available information, an event test analyzes the security both before and after an event. The idea behind the event test is that an investor will not be able to reap an above average return by trading on an event.
Regression/Time Series Tests
Remember that a time series forecasts returns based historical data. As a result, an investor should not be able to achieve an abnormal return using this method.
Abnormal return = Actual Returnl - Market Return;
Risk adjusted abnormal return = Actual Returnl -Market Return x beta
Test Result: mixed.
The semi-strong form EMH, at times, is both supported and not supported by the tests and analysis done. There has been some evidence that securities are not reflective of the semi-strong form EMH.
Supported by event studies: abnormal returns around stock splits (no LT or ST impact), IPOs (price adjustment occurs within 1 day of offering , exchange listing do not cause permanent change in LR value. and accounting changes).
Rejected by time series tests: term structure of interest rates and dividend yield can be used predict LR prices, earning surprise not be reflected as fast as semistrong EMH expected. Thus one can predict for individual price:
Calendar studies - January anomaly & weekend effect does work
Cross sectional tests -neglected, low PE, and high P/B firms (regardless of the size) have higher returns; small size firms have higher return
Showing posts with label Organization and Functioning of Securities Markets. Show all posts
Showing posts with label Organization and Functioning of Securities Markets. Show all posts
Wednesday, November 26
Tuesday, November 25
Market Indexes and Factors ot costruct index
Market indexes:
· to represent the behaviour of the market
· to track the market movements,
· to construct market-tracking (index) portfolios,
· to evaluate the performance of actively-managed funds
· to calculate market risk premium and betas
Factors to construct index:
· sample be representative of population
· weighting by price, total value or equal weight
· maths & computation method
· to represent the behaviour of the market
· to track the market movements,
· to construct market-tracking (index) portfolios,
· to evaluate the performance of actively-managed funds
· to calculate market risk premium and betas
Factors to construct index:
· sample be representative of population
· weighting by price, total value or equal weight
· maths & computation method
Margin trading
Margin Trading
· Buying securities with borrowed money.
· Margin funds provided by brokers at a rate above bank call money rate.
· 100% of the purchase cannot be with borrowed funds. Percentage of own funds (equity) is called margin requirement.
· Fed sets minimum initial margin but brokers can set a higher level.
Initial margin: Initial equity required for margin purchase.
Maintenance margin: Minimum equity required as a fraction of the total value of the stock in the margin account.
Margin call: Request for funds made by the broker if the value of the margin account falls below the maintenance margin level. Investor must deposit sufficient funds to return percentage of equity to the initial margin level.
Variation margin: Money deposited to bring the margin account back to required level.
Leverage factor = 1 / % Initial margin.
Levered return = Holding period return x Leverage factor.
Margin call for long position is triggered when price falls to:
(Purchase price) x (1 – % Initial margin) / (1 – % Maintenance margin).
Margin call for short position is triggered when price rises to:
(Purchase price) x (1 + % Initial margin) / (1 + % Maintenance margin)
· Buying securities with borrowed money.
· Margin funds provided by brokers at a rate above bank call money rate.
· 100% of the purchase cannot be with borrowed funds. Percentage of own funds (equity) is called margin requirement.
· Fed sets minimum initial margin but brokers can set a higher level.
Initial margin: Initial equity required for margin purchase.
Maintenance margin: Minimum equity required as a fraction of the total value of the stock in the margin account.
Margin call: Request for funds made by the broker if the value of the margin account falls below the maintenance margin level. Investor must deposit sufficient funds to return percentage of equity to the initial margin level.
Variation margin: Money deposited to bring the margin account back to required level.
Leverage factor = 1 / % Initial margin.
Levered return = Holding period return x Leverage factor.
Margin call for long position is triggered when price falls to:
(Purchase price) x (1 – % Initial margin) / (1 – % Maintenance margin).
Margin call for short position is triggered when price rises to:
(Purchase price) x (1 + % Initial margin) / (1 + % Maintenance margin)
Short selling
Short selling refers to the order to sell securities that seller does not actually own. The seller must borrow securities via a broker and return them to the lender at the end of loan period. Short seller believes that current price is too high and will fall soon.
Procedures:
· borrow securities
· inform broker the order is a short sales
· return security at the request of lenders or when closed out.
Rules of short selling:
· Shorting only allowed if previous price movement is up (uptick rule).
· Short seller must pay dividends due to the security lender.
· Short seller must deposit margin money to guarantee the repurchase of the security (to cover the possibility of the price rising after the short sale)
Procedures:
· borrow securities
· inform broker the order is a short sales
· return security at the request of lenders or when closed out.
Rules of short selling:
· Shorting only allowed if previous price movement is up (uptick rule).
· Short seller must pay dividends due to the security lender.
· Short seller must deposit margin money to guarantee the repurchase of the security (to cover the possibility of the price rising after the short sale)
Types of orders
Market orders
· filled immediately at the best available price
Limit orders
· set a limit on price for transaction, i.e. below market price for buy order, above market price for sell order
Stop orders
· triggered if stop price is reached, i.e. below market price for sell order, above market price for buy order
Stop loss(sell)
· place below current price, protect gain for future price reversal;
Stop buy
· place above current price, protect a short sale position from a rising market.
· filled immediately at the best available price
Limit orders
· set a limit on price for transaction, i.e. below market price for buy order, above market price for sell order
Stop orders
· triggered if stop price is reached, i.e. below market price for sell order, above market price for buy order
Stop loss(sell)
· place below current price, protect gain for future price reversal;
Stop buy
· place above current price, protect a short sale position from a rising market.
Characteristics of Exchange Markets
The main characteristics of exchange markets can be classified into:
· Exchange membership
· Types of orders
· Market makers
Exchange Membership in US
· Specialist- market maker that control limit order trades
· Commission borker- employees of a member firm that is a member of the exchang and buy/sell for the clients of the firm
· Floor traders- not employees of a member firm, as freelance brokers for other commission brokers
· Registered traders-independent, trade for their own account.
Market makers:
Market makers facilitate the trading in a stock, buying and selling stock from their own accounts in order to maintain orderly trading and provide liquidity, manage the limit order book where both limit and stop orders are recorded. Also known as a specialist in US.
· Exchange membership
· Types of orders
· Market makers
Exchange Membership in US
· Specialist- market maker that control limit order trades
· Commission borker- employees of a member firm that is a member of the exchang and buy/sell for the clients of the firm
· Floor traders- not employees of a member firm, as freelance brokers for other commission brokers
· Registered traders-independent, trade for their own account.
Market makers:
Market makers facilitate the trading in a stock, buying and selling stock from their own accounts in order to maintain orderly trading and provide liquidity, manage the limit order book where both limit and stop orders are recorded. Also known as a specialist in US.
Structural Differences Among the Different Markets
National Stock Exchanges
These exchanges trade numerous issues of diverse shares to a wide number of investors. A national stock exchange operates as an auction market where buyers and sellers are driven by price.
Examples:
· The New York Stock Exchange (NYSE)
· The American Stock Exchange (AMEX)
· The London Stock Exchange (LSE)
Regional Exchanges
A regional exchange is similar to the national stock exchanges except regional exchanges serve smaller markets and typically trade smaller issues. A company that cannot list its shares on a national stock exchange because it does not meet the requirements may choose to list its share on a regional exchange.
Example: The Boston exchange
Over-the-Counter Markets (OTC)
An OTC market is a less formal exchange. Both listed stocks and unlisted stocks can trade in the OTC market. The OTC market operates as an order- driven market where buyers and sellers submit bids and a dealer buys or sells the stock from his own inventory. The OTC market is also referred to as a negotiated market.
Example: Nasdaq
These exchanges trade numerous issues of diverse shares to a wide number of investors. A national stock exchange operates as an auction market where buyers and sellers are driven by price.
Examples:
· The New York Stock Exchange (NYSE)
· The American Stock Exchange (AMEX)
· The London Stock Exchange (LSE)
Regional Exchanges
A regional exchange is similar to the national stock exchanges except regional exchanges serve smaller markets and typically trade smaller issues. A company that cannot list its shares on a national stock exchange because it does not meet the requirements may choose to list its share on a regional exchange.
Example: The Boston exchange
Over-the-Counter Markets (OTC)
An OTC market is a less formal exchange. Both listed stocks and unlisted stocks can trade in the OTC market. The OTC market operates as an order- driven market where buyers and sellers submit bids and a dealer buys or sells the stock from his own inventory. The OTC market is also referred to as a negotiated market.
Example: Nasdaq
Call vs. Continuous Markets
Two typical structures of a securities exchange:
Call Markets
Where a stock can only trade at a specific time. Bids for the stock are collected and then traded at a specific time and at one price. It is typically only used for smaller markets.
Continuous Markets
Where a stock can trade at any time as long as the market is open. Buyers and sellers are matched up on a continuous basis and the price is determined through an auction or through bid-ask quotes.
Call Markets
Where a stock can only trade at a specific time. Bids for the stock are collected and then traded at a specific time and at one price. It is typically only used for smaller markets.
Continuous Markets
Where a stock can trade at any time as long as the market is open. Buyers and sellers are matched up on a continuous basis and the price is determined through an auction or through bid-ask quotes.
Primary, Secondary, Third and Forth Markets
The Primary Market
The primary market refers to the market where new issues (stocks and bonds not sold before) are sold. Investment bankers, acting as underwriters, bring new issues to the market through the primary market, either an Initial Public Offering (IPO) when the stock has not previously traded, or as a seasoned offering once the stock has traded but new shares are being added to the market.
Governments generally issue via auctions or private placements.
Government bonds
· at public auction. Federal Reserve guarantee average of accepted competitive bids.
Municipal bond
· issued by local government through:
· hire investment banks to structure, price, distribute and underwrite new issues.
A secondary market is the market in which assets are traded after they have been sold through the primary market. In this market, investors trade directly with each other through an exchange.
U.S. government/municipal bonds - traded through banks, investment banks.
Treasuries - traded through treasury dealers.
Corporate bonds - through the OTC market, also takes place on the New York Stock Exchange and the American Stock Exchange.
Third market:
OTC trading in exchange-listed securities.
The primary market refers to the market where new issues (stocks and bonds not sold before) are sold. Investment bankers, acting as underwriters, bring new issues to the market through the primary market, either an Initial Public Offering (IPO) when the stock has not previously traded, or as a seasoned offering once the stock has traded but new shares are being added to the market.
Governments generally issue via auctions or private placements.
Government bonds
· at public auction. Federal Reserve guarantee average of accepted competitive bids.
Municipal bond
· issued by local government through:
- Competitional bidding, the underwriter with competitively determined fee
- Negotiated underwriting, the underwriter with negotiated fee
- Private placement, sell directly to investor without underwriter.
· hire investment banks to structure, price, distribute and underwrite new issues.
- Seasonal issues- firms already has shares trading in market;
- IPO-firms not currently trades in market through methods:
- Best efforts-investment bank do not take price risk, no price guarantee
- Competitive bids
- Negotiation
A secondary market is the market in which assets are traded after they have been sold through the primary market. In this market, investors trade directly with each other through an exchange.
U.S. government/municipal bonds - traded through banks, investment banks.
Treasuries - traded through treasury dealers.
Corporate bonds - through the OTC market, also takes place on the New York Stock Exchange and the American Stock Exchange.
Third market:
OTC trading in exchange-listed securities.
Fourth market:
Direct trading between investors without any intermediation.
Characterisics of well-functioning securities market
Well-functioning markets provide:
(1) timely and accurate information
(2) high liquidity
· marketability - ability to sell an asset quickly
· price continuity - prices do not change substantially from one transaction to another unless significant new news arises
· depth- numerous buyers & sellers
(3) internal efficiency- access and settlement at a low cost.
(4) External Efficiency- rapidly adjust to new information
(1) timely and accurate information
(2) high liquidity
· marketability - ability to sell an asset quickly
· price continuity - prices do not change substantially from one transaction to another unless significant new news arises
· depth- numerous buyers & sellers
(3) internal efficiency- access and settlement at a low cost.
(4) External Efficiency- rapidly adjust to new information
Subscribe to:
Posts (Atom)
