The efficient markets hypothesis is associated with the information efficiency of the securities market and assumes that the prices of instruments traded on the market, and, first of all, ordinary shares, are edited by information available to the market. This occurs when market operators believe that expected information may change the investment characteristics of the stock (return, risk, liquidity). The receipt of such information directly affects not stock market prices, but market operators who receive it, process it and make investment decisions. Goldman Sachs traders determined that only 3% of all information available in the market to managers, investors and traders is meaningful. Therefore, it is initially important for a fundamental analyst to determine what information is significant, and use it in a model to predict the future price of a stock, and abstract from the rest of the “information noise.”

Analysis of what information can provide recommendations regarding certain assets? This is due to the level of market development, or more precisely, to what information it manages to translate into changing prices. The identification of three forms of capital market information efficiency was proposed in 1967 by University of Chicago researcher Harry Roberts, whose work was never published. This idea was reflected in the 1970 article “Efficient Capital Markets: A Review of Theory and Empirical Research,” authored by Eugene Fama. Scientists have suggested that it is possible to classify markets according to the degree of their efficiency, which is determined by the market’s ability to objectively and correctly form a price, and proposed the classification below.

1. If securities prices reflect all information about their prices in the past, then the market has weak-form efficiency.

In such a market, when investing in a particular asset, it is impossible to extract returns above the market using only information about the historical prices of assets. When the market knows only the past price of a blue chip company's stock, and the financial analyst can calculate its true value, there is an objective opportunity to profit from it. In these conditions, fundamental analysis can be very useful, identifying prospects for profit and changes in the yield of securities, and, therefore, indicating the presence of price anomalies.

2. Average degree of efficiency - semistrong-form efficiency implies that all publicly available information is fully reflected in securities prices. Operating in a market that has a semi-strong form of information efficiency, it is impossible for an investor to systematically beat the market using only publicly available information for trading decisions.

If fundamental analysis in such a market is carried out only on the basis of all known (public) information about the Blue Chip company, then the investor will most likely not be able to make a profit. But, having experience, assumptions and having some confidential information about this company, the analyst can use fundamental analysis models to determine future price movements, and such recommendations can bring the investor super-profits.

3. With strong form (strong-form efficiency) market efficiency, absolutely all, even confidential information is already fully reflected in securities prices. Therefore, if the market has a strong form of information efficiency, then, operating on it, it is impossible to systematically, using all the information, including insider information, extract excess profits.

In a perfectly efficient market, securities are always correctly priced and there is no need for fundamental valuations. The strong form of market efficiency allows you to invest without using the recommendations of fundamental analysis to select certain shares as an object of financial investment, because it is impossible to carry out transactions on it, the net present value (NPV) of which would differ from zero.

Since the strong form of the efficient markets hypothesis is unprovable and untestable empirically, since its testing requires access to the information of all insiders, recommendations have focused on the first two forms of efficiency.

This is especially significant since the domestic securities market cannot be so efficient initially, because none of the conditions for the efficiency of the stock market are empirically confirmed on it:

• an efficient market has a large number of operators;
• all capital market participants have access to all relevant information affecting exchange rates;
• any market operator competes freely and equally in the securities market.

Information and technological asymmetries in the Russian securities market create price anomalies. As new information randomly arrives, reactions to it, and the expectations of market operators, the dynamics of stock asset prices, in turn, change randomly. The efficient markets hypothesis suggests that short-term movements in stock prices are unpredictable. Empirical research shows that in the domestic securities market, the amount of income can be much greater than the risk taken by the investor, but it can also be much less than the amount of risk inherent in a given investment. This difference between the actual return received and the investment's own return is called abnormal return. An anomaly can only be obtained if the securities are incorrectly priced, i.e. their prices do not correspond to their value. Abnormal returns occur when the relationship between risk and return is broken, meaning that investors who take higher risks demand higher returns. If the market were balanced, then there would be no anomalies, and it would be impossible to obtain returns other than normal in the market.

For an analyst who uses fundamental analysis in his arsenal, it is useful to know the theoretical conclusions of the efficient markets hypothesis:

• 1. A market where all securities are always correctly priced is called an efficient market. An efficient market quickly forms an equilibrium price and therefore it is impossible to obtain a profit different from the normal one (profit of the market portfolio) in such a market. In an efficient market, prices reflect all relevant information, and thus investors cannot find anomalies using this information.
• 2. In an efficient market, risk is rewarded, and investors with greater risk receive, on average, greater returns. The rate of return that investors receive in an efficient market corresponds to the amount of risk they accept. Normal return is the return on the market portfolio, i.e. the totality of all securities traded on the market.
• 3. In an inefficient market, there are price anomalies and there are abnormal returns, which the fundamental analyst is looking for.
• 4. The price fluctuates unbiasedly around the true value of the securities, and the transaction is concluded at a fair price; information affecting price dynamics quickly reaches all market operators
• 5. In an inefficient market, holders of confidential information have a clear advantage over other operators. Even professional market participants, if they do not have access to internal information of issuers, will not be able to regularly provide returns above the market average. To do this, they must be willing to accept above-average risks.
• 6. In an efficient market, investments are always correctly priced, then the only thing a reasonable investor can do without resorting to fundamental and technical analysis is to use an index investing model. The efficient markets hypothesis gave birth to a new investment technology: instead of selecting shares of a specific company, a portfolio is built according to the model of a particular stock index, which includes shares of a certain financial market, a certain market segment, a certain sector of the economy, or a certain region of our world.

THINGS TO REMEMBER

An efficient market is a concept that exists only in theory, because existing securities markets are never in equilibrium due to the constant influx of information and other external factors.

Information efficiency is a key factor that can improve the quality of resource allocation in an economic system.

The market is most efficient in relation to received information if this information entails an immediate and complete reflection on the price of assets, which makes this information useless for obtaining excess profits. But not every financial market is information efficient.

Depending on the degree of reflection in the price of a security and information about it, different degrees of market efficiency are distinguished. A market is considered to have a weak degree of information efficiency if the dynamics of exchange rates over the past period does not allow one to predict the future value of the price and, consequently, decisions to buy or sell securities made on the basis of technical analysis methods, which does not allow systematically obtaining a different level from the market average profit.

A market has an average form of information efficiency if all publicly available information of an economic, political and corporate nature does not have any predictive power and its use in fundamental analysis does not allow profit to be made above the market average. With weak information efficiency, the market loses its attractiveness for small traders due to the lack of opportunities to make large investments for the long and medium term.

In an information-efficient market, investors, based on the company's fundamental indicators, can make a reliable assessment of the impact of the information flow of events on the profitability of a security. Also, in an informationally efficient market, the expected return embedded in the price of an asset correctly reflects the expected risk, which is an important factor for investors when making financial investments.

Although the market strives for efficiency, it is not always observable. One of the reasons why markets can be informationally inefficient is the lack of a minimum required number of investors constantly analyzing information and making transactions in accordance with the results of the analysis, thereby bringing prices into agreement with incoming information. Typically, these are investors who believe that the market is inefficient and, therefore, seek to obtain returns that exceed those that correspond to the risk of these assets, that is, they seek to maximize the expected benefit. The greater the number of such investors present in the market, the more efficient it is. And a large number of aggressive investors trying to immediately adjust the price of an asset to new information means more trading volume. So market efficiency increases with increasing volumes.

Other reasons for market inefficiency may include the presence of transaction costs, taxes and other factors, such as imperfect legal frameworks, that impede transactions. Another reason why the market is inefficient is that information is not available to all market participants at the same time and its receipt is associated with some costs. Although information of any type is not taken into account by the market immediately after it appears in the market environment, there is always some interval of time before this information is recognized by the market, which in turn will affect the price of the asset. By that time, new information may appear, usually private, affecting the price again after a certain period of time, but accessible to a limited number of people so that they can receive greater profits.

To determine market inefficiency, a lot of research has been carried out by academic economists. One of the methods for determining information inefficiency is to construct a regression equation for predicting the price of a stock instrument. If the regression equation turns out to be statistically significant, then a conclusion is made about the inefficiency of the stock market, i.e. prices for shares on each subsequent day will depend on prices on the previous trading day, and will not change after new information about the issuer arrives on the stock market.

The second way to determine market inefficiency is the method of nonparametric statistics. According to this method, depending on whether the stock price increases or decreases compared to the previous value, increments of absolute price values ​​in time series are replaced by “plus” or “minus” signs.

The third way to determine information inefficiency is based on measuring correlations between security returns and information flow over time. Based on the results of the above methods, the presence of a weak tendency towards a positive correlation in the returns of short-term securities is revealed.

To develop the stock market of Kazakhstan and increase its information efficiency, the following areas are necessary:

Increasing the level of market liquidity;

Increasing the level of information transparency;

Increasing the level of protection of investor rights.

Today, almost all existing brokerage companies provide information database services, but it should be noted that this service is mainly aimed at institutional investors. Bloomberg is one of the leading providers of financial information for professional participants in financial markets. The main product is the Bloomberg Professional terminal, through which you can access current and historical prices on almost all world exchanges and many over-the-counter markets, the Bloomberg news feed and other leading media, an electronic trading system for bonds and other securities. The Irbis Information Agency provides information only to professional participants. Firstly, the cost of gaining access to the information database is very high and several times higher than the monthly profitability of an individual investor. Secondly, the content of the information provided plays a role. As a result, there is practically no information base on the Kazakhstan market that can provide information within the limits of affordable costs for an individual investor. Hence the need to open an information center, providing information to investors and stakeholders, not only on the financial statements of the listing company, but also providing complete fundamental analysis.

The creation of this center will solve a number of problems. Firstly, it will improve the quality of investment. Secondly, it will help assess the quality of management and qualifications of the portfolio manager on the part of shareholders, which will result in an increase in the level of trust in investors and the level of corporate governance. And finally, this center will be an additional source of income for the exchange. However, it is not recommended to create a center on a 100% paid basis. To make such information available to individual investors, a ranked price may be provided depending on the amount of information provided.

Because in an efficient market new information is quickly reflected in price, the current price of an asset reflects all the information already available. Therefore, the current price of an asset is always an unbiased estimate of all information relevant to that asset, including the expected risk of owning that asset. Therefore, the expected return embedded in the asset price correctly reflects the expected risk. It follows from this that in an inefficient market, current prices are not always fair and change not only under the influence of new information.

In conclusion, I would like to quote from the work of Z. Body, A. Kane and A. Marcus: “An overly doctrinaire belief in efficient markets can paralyze the investor and create the impression that any research activity is pointless.”

The existence of a weak form of securities market efficiency has been proven quite convincingly. Any information that could be gleaned from analyzing past quotes is reflected in the stock price. Many investors who support the efficient market hypothesis believe that it is advisable to use passive methods of managing a securities portfolio, since active management is associated with significant material costs. Consequently, even in the presence of an efficient market, an investor must constantly expend effort aimed at building a diversified portfolio of securities.

Literature:

1. Information efficiency of the market - /studyfinance.ru/

2. G.V. Dyadenko. Evolution of the form of information efficiency of the Russian stock market / Journal of Economics and Mathematical Methods.

3. Theoretical aspects of information efficiency of financial markets. /bibliofond.ru/download_list.aspx?Id=482789

4. “Hypothesis about market efficiency.” /www.aton-line.ru/study/manual/

5. Fedorova E.A., Ph.D., Associate Professor. Statistical modeling of assessing changes in the efficiency of the stock market and its practical application / Journal of Audit and Financial Analysis / - 2009

6. Brigham Y., Gapenski L. Financial management: a complete course: In 2 volumes / Transl. From English Ed. V.V. Kovaleva. /- 1997.

Cost of Capital Concept

Risk-return trade-off concept

The concept of risk-return trade-off involves achieving a reasonable balance between risk and return.

It lies in the fact that obtaining any income in business most often involves risk, and the relationship between these two characteristics is directly proportional: the higher the required or expected profitability, i.e. the return on invested capital, the higher the degree of risk associated with the possible non-receipt of this return; the opposite is also true.

The concept of estimating the cost of capital is of key importance in the analysis of investment projects and the selection of alternative options for financing the company's activities.

Each source of financing has its own cost, for example, you have to pay interest on a bank loan. With a large selection of funding sources, the manager must choose the best option.

The concept of the cost of capital involves determining the minimum level of income necessary to cover the costs of maintaining a given source of financing and allowing it not to be at a loss.

Decision-making and behavior choices in the capital market, as well as the activity of operations, are closely related to the concept of market efficiency.

The concept of securities market efficiency takes into account the speed of reflection of information about the securities market on their prices, the degree of completeness and freedom of access of all market participants to information.

Suppose that in a market that was in equilibrium, new information appears that the price of shares of a certain company is undervalued. This will lead to an immediate increase in demand for the stock and a subsequent increase in the price to a level corresponding to the intrinsic value of that stock. How quickly information is reflected in prices and is characterized by the level of market efficiency. The degree of market efficiency is characterized by the level of its information saturation and availability of information to market participants.

There are three forms of market efficiency:

Moderate,

Strong.

In conditions weak form efficiency, current stock prices fully reflect the price dynamics of previous periods, i.e. a potential investor cannot gain additional benefits by analyzing trends; in other words, an analysis of price dynamics, no matter how thorough and detailed it may be, will not allow you to “beat the market,” i.e. receive excess income. So, in conditions of a weak form of market efficiency, a more or less reasonable forecast of an increase or decrease in exchange rates based on statistical data on price dynamics is impossible.

In conditions moderate form efficiency, current prices reflect not only past price changes, but also all information that is equally accessible to participants. From a practical point of view, this means that the analyst does not need to study price statistics, issuers’ reports, reports from specialized information and analytical agencies, including forecasts, since all such publicly available information is immediately reflected in prices.

Strong form efficiency means that current prices reflect not only publicly available information, but also information to which access is restricted. If this hypothesis is correct, then no one will be able to receive excess profits from playing stocks, even the so-called insiders, i.e. persons working in an organization operating a financial market and (or) due to their position having access to information that is confidential and can bring them benefit.

the ratio of asset prices and information, which is a reflection of all available data on assets, covers their profitability and reflects the expected risk, analyzed and independently assessed by competing investors

The hypothesis about market efficiency, methods of its analysis, postulates underlying the theory of asset valuation - all this will help the reader understand which market can be considered efficient, as well as what is the role of the concept of market efficiency in modern conditions

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Market efficiency is the definition

EfficiencyRynka is information efficiency, i.e. An efficient market is a market whose prices reflect known information about the situation on the market, that is, this is the level of market efficiency at which all information related to a security, both public and private, is fully and instantly reflected in its value , prices in such a market are fair, which means that their changes are random, they instantly and completely reflect both positively and negatively affecting information.

Market efficiency is a market in which there is equal free access to information regarding existing investment opportunities, that is, anyone who engages in trading activity is able to use the information to evaluate the past performance of the security in question and, accordingly, is able to identify the reasons that led to the current market price of a security, responsibly predicting its future dynamics based on current indicators.

EffectiveawnmarketA - This a market in which the value of securities instantly reacts to new information, fully and correctly taking it into account when determining the price of securities, that is, the market is efficient if it “quickly adapts to new information.”

Market efficiency is information efficiency, that is, the degree of speed and completeness of reflection of all information affecting the pricing of assets in their prices.

Market efficiency is a market in which the market price is determined by an unbiased estimate of the true value of an investment. Depending on the nature of this information, there are weakly efficient, quasi-efficient and highly efficient markets.

For investors about market efficiency

Concept of market efficiency

The concept of an efficient market in theory is based on the following basic postulates:

Information becomes available to all market participants simultaneously and its receipt is not associated with any costs.

There are no transaction costs, taxes or other factors that impede transactions.

Transactions made by an individual or legal entity cannot affect the general price level.

All market actors act rationally, seeking to maximize expected benefits.

It is obvious that all these four conditions are not met in any real market - time and money are needed to obtain information, some subjects receive information earlier than others, there are transaction costs, and taxes have not been abolished. In view of the failure of these conditions, it is necessary to distinguish between the ideal information efficiency of the market and their economic information efficiency.

In an ideally efficient market, where all of the above conditions are met, prices always reflect all known information, new information causes an immediate change in prices, and excess profits are possible only through luck. In an economically efficient market, prices cannot immediately respond to the arrival of new information, however, provided that information and transaction costs are eliminated, there are no excess profits in this market either.

Postulates of the theory of asset valuation

In the previous material, the theory of asset pricing (CAPM) was presented based on common sense considerations. A more rigorous construction of the theory is based on a system of postulates. There are only nine of them:

The stock market is a perfectly competitive market. This means that no individual investor (or group) is able to influence the price set in the market by his actions - his wealth is negligible compared to the wealth of all other investors.

Investors rationally seek to maximize the Sharpe ratio of their portfolios. (Recall: the Sharpe ratio is equal to the difference between the expected portfolio return and the risk-free rate, divided by the expected standard deviation of the portfolio return.) Thus, investors strive to maximize not wealth, but their own utility function (i.e., they make decisions taking into account risk). The desire to maximize wealth would lead to a preference for assets with the highest expected return (and greatest risk).

All information is distributed to investors free of charge and simultaneously.

Investors' expectations are homogeneous. Those. investors equally evaluate the probability distribution of future asset returns. Violation of this postulate leads to the emergence of many efficient boundaries and disruption of market equilibrium. However, it can be shown that as long as the differences in investor expectations do not become prohibitively large, the impact of removing this restriction on CAPM results is small.

All investors have the same investment horizon. This postulate is necessary for the existence of a single risk-free return. If investors invest for different periods of time, then they have different risk-free returns. In this case, the stock market line would “blur”, especially as it moves away from point M.

The stock market is in equilibrium. In the sense that all asset prices correctly reflect their inherent risk.

Investors can lend and receive credit at the same risk-free rate. The difference in rates causes the capital market line to become broken. The theory easily extends to the case of differing rates.

There are no taxes, no transaction costs (commissions and slippage), and no restrictions on short selling. Transaction costs cause the stock market line to transform into a stripe. If there is taxation that is not uniform across all investors, then the “expected return/expected risk” plane is transformed into a three-dimensional space, where the third dimension will be the tax rate. If there are restrictions on short selling, the stock market line will be curved rather than straight.

The total number of assets is fixed, all assets are tradable and divisible. Essentially, this postulate means that when valuing assets, the liquidity factor can be neglected.

From the comments it is clear that many of the restrictions introduced by the postulates can be significantly weakened or completely removed. In this case, almost all the conclusions of CAPM are preserved, and only the system of evidence becomes significantly more complicated. And practice convinces us of the stability of the CAPM conclusions - this theory is widely used because it works quite well.

It should be noted here that CAPM is largely based on the assumption that the market is efficient - the first five postulates are precisely what are needed for the market to be efficient. We can assume that we already have a strict definition of the conditions under which the market will be efficient. But what is an efficient market?

Which market can be considered efficient?

There are many definitions of an efficient market (and different approaches to definitions). But recently, the following basic definition has crystallized: a capital market is efficient if asset prices respond quickly to new information. Sometimes this definition is called narrow, meaning that only the information efficiency of the market is meant.

Why should the market be efficient? Three reasons are usually given for the explanation:

There are a large number of competing investors independent of each other on the market, each of whom analyzes and evaluates assets independently.

New information enters the market randomly.

Competing investors try to quickly adjust asset prices to incoming information.

A few words about the theory of efficiency

This adjustment of the asset price to new information in an efficient market is not biased, although it may be imperfect. This sentence sounds complicated, but it is precise in a mathematical sense. It means that the market can either overestimate the price of an asset in relation to new information, or, conversely, underestimate it, but on average (both over time and over assets) the assessment will be correct (unbiased), and predict in advance when it will be overestimated, and when it is underestimated, it is impossible.

The process of bringing prices into line with incoming information requires the presence in the market of a certain minimum number of investors who constantly analyze the information and make transactions in accordance with the results of the analysis. The greater the number of such investors present in the market, the more efficient it is. And a large number of aggressive investors trying to immediately adjust the price of an asset to new information means a large volume of trading. So market efficiency increases with increasing volumes. In addition, the market can be efficient in relation to some assets (liquid), and at the same time, ineffective in relation to others (low-liquid).

Because in an efficient market new information is quickly reflected in price, the current price of an asset reflects all the information already available. Therefore, the current price of an asset is always an unbiased estimate of all information relevant to that asset, including the expected risk of owning that asset. Therefore, the expected return embedded in the asset price correctly reflects the expected risk. It follows from this that in an efficient market, current prices are always fair and change only under the influence of new information. One of the definitions of an efficient market is precisely that it is a market in which the prices of all assets are always fair.

Thus, in an efficient market, it is impossible to construct either a trading system or an investment strategy that could provide a return greater than that expected by the market in accordance with the risk of the investment.

To answer the question of whether the real stock market is efficient, we had to formulate the market efficiency hypothesis (MER) and look for evidence that it is true. Looking ahead, it can be noted that many studies support the GER, but many also refute it, so the question of the effectiveness of the real market remains open. Since the issue is extremely important from a practical point of view, we will have to pay more attention to it.

Market Efficiency Hypothesis (MER)

For ease of testing, the hypothesis about market efficiency was formulated in three forms: weak, medium and strong.

All available information reflected in this diagram can be divided into three groups. The first group consists of information about past exchange rate dynamics, that is, historical data on changes in prices for various securities. Together with other forms of public information, it is included in the second group - publicly available information. In addition to publicly available information, there is information that is distributed privately; as a rule, this is information from insiders about the state of affairs in a particular company, its immediate plans and intentions. Such information forms the third section of data classification - private information.

Weak degree of market efficiency

It is believed that the market has low degree of effectiveness, if the prices of instruments traded on it reflect only the information contained in the dynamics of past quotes. In such a market, it is impossible to obtain excess profits using only data on changes in securities prices in previous periods. It can be concluded that almost any organized stock market, in which a system for informing about price changes has been established, has a weak degree of efficiency. This conclusion is confirmed by the results of scientific research: no matter how deep statistical analysis of historical data on price changes does not allow one to accurately predict their future behavior.

Checking the weak form of GER

To test the validity of the weak form of GER, two groups of tests were carried out.

Statistical tests. If the market is efficient, then there should be no correlation between the returns of an asset at different time intervals, i.e. the autocorrelation coefficient of the asset's return should be close to zero. Studies on a wide range of assets have confirmed that this is the case - no statistically significant deviations from zero were observed for autocorrelation coefficients.

In addition, a test was carried out for the random nature of the series of price changes (runs test). If the price of an asset increases in the selected interval, it is assigned a “plus” sign; if it decreases, it is assigned a “minus” sign. Then the price dynamics over time looks something like this:

(the asset grows on the first day, declines on the second, then grows for four days in a row, etc.). It turned out that the distribution of series of continuous repetitions of pluses and minuses does not differ from a random distribution (i.e., the same series of heads and tails can be obtained by tossing a coin).

Trading strategies based on technical analysis. Two difficulties arose here. The first was that many technical analysis recommendations are based on subjective interpretation of data (for example, on the same chart, some analysts see a “head and shoulders” formation, while others do not). The second is that you can come up with an almost infinite number of trading strategies, and it is impossible to test them all. Therefore, only the most well-known strategies based on objective data analysis were tested.

As a result, it turned out that the vast majority of trading strategies do not provide a statistically significant gain compared to the “buy and hold” strategy. Of course, taking into account commissions - many “winning” strategies require a large number of transactions, and as a result, costs eat up all the additional winnings. But still, the results are not entirely clear - several recent studies have shown the possibility of winning for some strategies. In general, the research confirms the common belief that in a liquid market, known strategies do not win, but you can hope to “beat” the market by coming up with a new strategy. This can provide excess returns until a significant number of investors follow it.

Conclusions. Developed markets are weakly efficient, but there is some evidence to suggest that there may be underperformance relative to some trading strategies developed from technical analysis.

Average degree of market efficiency

If the current market prices reflect all publicly available, i.e. public information, the market has average degree of efficiency. In this case, it becomes impossible to obtain excess profits from possessing such information. It is generally accepted that the most well-known organized stock markets in the world are moderately efficient. Research shows that in such markets, any new publicly available information is reflected in the price on the day it is made public, i.e. it immediately becomes known to all market participants, so the possibility of monopoly ownership and profitable use of such information by individual players is practically excluded.

Checking the average form of GER

Publication of financial statements. Research has shown that excess (positive) investment returns can be achieved by buying shares after the release of quarterly reports in which the company's earnings are higher than analysts' average expectations. Moreover, if such a discrepancy exceeds 20%, then the excess profitability on average exceeds the commission costs. According to available statistics, 31% of excess growth occurs in the period before the announcement, 18% - on the day of the announcement, and 51% - in the period after the day of the announcement (the effect is usually exhausted within 90 days). If the data is worse than expected (negative surprise), then the market reacts much faster, and it remains unclear whether excess returns can be made by selling such shares short.

Calendar effects. It has been observed that in the United States, at the end of the calendar year, many investors sell those stocks on which they suffered the greatest losses in the past year in order to receive tax deductions. In the first week of January (mostly on the very first trading day), these same shares are bought back. That is, the market declines abnormally at the end of the year, and grows abnormally at the beginning of the year (January effect). Research has shown that such an effect does exist, and the smaller the company, the larger it is. Moreover, it is so large that it significantly covers transaction costs. (In an efficient market, there would be enough borrowed investors to buy stocks at the end of the year and sell them at the beginning to correct the anomaly.) Another explanation for the January effect is the window dressing of financial statements by investment fund managers, as they are wary of showing assets that suffered significant losses on their balance sheets.

Among other calendar effects, we can note the end-of-week effect - price changes from market closing on Friday to market opening on Monday are on average negative. Interestingly, such price changes are persistently positive in January and persistently negative in all other months.

Important events. It is known that the market reacts violently to the publication of important events in the politics and economy of both the world (country) and an individual corporation - price changes can be significant and occur very sharply. Is it possible to use this to get extra profit? As it turns out, the answer depends on the type of events.

Unexpected events in the world and news about the state of the economy. If the publication occurs while the market is closed, it opens at prices that fully take into account the news (on average, of course), and no additional profitability can be extracted. If the publication takes place during a working market, price adaptation takes place within approximately one hour.

Share split. Contrary to popular belief, publishing a decision on a stock split (exchanging each old share of a company for several new ones in order to reduce the share price and thereby increase liquidity) does not allow for additional profitability.

IPO (initial public offering). A company goes from being closed to public by placing its shares on the stock exchange for the first time. On average, the share price rises by 15%, so it is profitable to take part in an IPO. But almost all the increase occurs on the first day of trading. So on average, the best strategy is to subscribe to the shares being offered and sell them on the first day of trading. Investors who bought shares on the market on the first day of trading on average lose relative to the market, so research in this area confirms the validity of the average form of GER (as well as for splits).

Passing the listing. From the moment the company’s decision to enter the stock exchange is published until the announcement of the listing, the average return is slightly higher than the market one, and after that – below the market one.

The existence of indicators that could be used to predict future market returns. In an efficient market, the best estimate of future returns is historical returns over a long period, and it is impossible to single out the mentioned indicators.

It turned out that such indicators do exist in the real market. You can use the market average dividend yield (the ratio of the dividend to the share price) - the higher it is, the higher the future profitability of the market as a whole. In addition, it was discovered that to predict the return on stocks and bonds, one can use the spread between the average yield of Aaa and Baa bonds (according to Moody’s), as well as the time spread between long-term and 1-month bonds.

However, short-term (up to 6 months) forecasts based on such indicators are not successful enough (on average, transaction costs are not covered), and the greatest success occurs over an investment horizon of two to four years. In addition, the success of forecasts highly depends on the state of the market - if the market is calm, the degree of reliability of the forecasts is low. If market volatility is high, then the degree of reliability of forecasts increases.

The existence of indicators that could be used to predict future returns on individual assets. In an efficient market, all assets without exception should have the same ratio of return to systematic risk (beta) and be located exactly on the stock market line (LFR). The purpose of the research was to discover indicators that would allow the detection of undervalued or overvalued assets taking into account risk. It should be noted that this type of research tests the combined hypothesis (market efficiency + CAPM fairness), since the risk of an asset is assessed using the CAPM.

Therefore, the ability to indicate assets that are not on the LFR indicates either the inefficiency of the market or the fallacy of the risk assessment methodology - it is impossible to separate these effects within the framework of such studies.

Studies of most indicators have failed to conclude that the market is inefficient or have shown mixed results. However, some indicators have also been discovered, following which allows you to extract returns greater than the market ones - they are listed below.

P/E ratio. Stocks with low P/E (the ratio of stock price to earnings per share) are systematically undervalued, while stocks with high P/E are overvalued. A possible explanation is that high P/Es are inherent in so-called “growth stocks”, and the market systematically overestimates growth prospects - in fact, growth is occurring at a lower rate than expected.

Market capitalization of the company. Small company stocks are systematically undervalued. The effect is enhanced if, among such stocks, you also choose stocks with low P/E. It should be noted that for shares of small companies transaction costs are much higher than for large ones, so the gain can only be obtained over a fairly long period (it was found that for US shares it is still slightly less than a year).

P/BV ratio. Stocks with low P/BV (the ratio of share price to book value of equity per share) are systematically undervalued, the effect of which is the strongest of these. The effect is most pronounced for small companies; in this case, there is no additional influence of the P/E ratio.

Conclusions. In general, the results of testing the average form of GER for developed markets are mixed. Research has shown market efficiency in relation to almost all significant events, both in the world and within the company.

At the same time, it has been established that it is possible to predict future stock market returns using indicators such as dividend yield or bond market spread. Calendar effects, the market's response to surprises in companies' quarterly reports, as well as the possibility of using indicators such as P/E, market capitalization and P/BV to obtain excess investment returns clearly testify against the GER. At the same time, the degree of market inefficiency is almost always small (taking into account transaction costs), and it is unclear whether it will persist in the future - some evidence suggests that over time the market becomes efficient relative to an increasing number of tests.

Strong degree of market efficiency

means that current market prices reflect not only public, but also private information, so it is impossible to “make money” even with top-secret information, for example, about the reorganization of a company. This option attributes to the market a certain mystical ability to read even the thoughts of its participants and determine their intentions regarding the expression of their eyes. However, the results of the research should reassure specialists in obtaining private secrets: there are no markets with a strong degree of efficiency in the world yet. Therefore, private information is still at a premium. With it you can make not just money, but a lot of money. Many people understand this. Including bodies monitoring exchange activities.

There is strict control over the behavior of insiders (primarily senior managers who own stakes in their companies) and regulation of their behavior on the market. In order to sell any significant amount of their securities, they must first inform the market community about this. Even if this is not done, information about the transaction will very quickly become publicly available information and will be reflected in the current price of specific financial instruments.

Thus, the mere possession of private information does not mean its automatic conversion into banknotes. It is necessary to show maximum ingenuity and caution in order to benefit from the available information. It is extremely difficult to do this without coming into conflict with the law (including criminal law). However, there are unlikely to be a large number of market players who would be afraid of these kinds of difficulties. Therefore, the emergence of a financial market with a strong degree of efficiency in any part of the globe is not expected in the near future.

Confirmation that real financial markets are still far from achieving absolute efficiency is the presence of a number of interesting patterns, steadily manifesting themselves from year to year. One of these patterns is the “January effect” - an excess of the average return on stocks in January over their return in other months of the year that has been observed for at least 70 years. On the NYSE, the average excess is about 3 percentage points. On the same exchange, a “day of the week effect” was discovered: stock returns on Mondays usually have a negative value. This is confirmed by data for a period of over 25 years. The Tokyo Stock Exchange has been experiencing the “small firm effect” for over 35 years, which manifests itself in the fact that the return on shares of small companies is higher than the return on securities of large corporations by about 5 percentage points.

One should not be surprised at the presence of such paradoxes. Without questioning the professionalism and sanity of market participants, we should not forget that they are all living people who tend to make not only individual mistakes, but also fall under such “collective illnesses” as mass psychosis and panic. The phenomenal nature of the market lies in the fact that, despite all possible random fluctuations and deviations in the actions of individual players, it stubbornly moves in the direction of its efficiency.

In an attempt to "outsmart" the market, a player can lose a lot, giving someone else the opportunity to make good money. But neither one nor the other has the right to declare that the market is inefficient. The investment strategy may have been ineffective. In the vast majority of cases, the strongest wins in the market. This is the key to the viability of the market and, perhaps, the underlying reason for its effectiveness. we can conclude: any existing market is efficient. An inefficient market is not a market, but the absence of a market.

Therefore, the statement that even in a weakly efficient market prices absorb all the information about the dynamics of past rates does not stop analysts studying market price statistics. It is the presence of a sufficiently large number of technical analysts that makes the very hypothesis of weak market efficiency viable. if at some point they all unanimously believed in this hypothesis and abandoned their unpromising occupation from the point of view of theory, the hypothesis would cease to exist. The market would lose the ability to adequately perceive information about the dynamics of past rates.

The situation is similar with the hypothesis about the average degree of efficiency of markets. In essence, it denies the advisability of predicting the future income of enterprises whose shares are quoted on the market. However, the assessment of financial assets based on this approach is even more widespread than technical analysis. The study of all publicly available information to determine future income streams, select the most appropriate interest rate level and discount cash flows is called fundamental analysis.

By performing it, market participants try to find securities that are undervalued or overvalued by the market. In the first case, they will buy the relevant assets, and in the second, they will refrain from buying them or, in the case of such securities in their portfolio, sell them. By doing this, they not only do not refute the hypothesis about the average degree of market efficiency, but, on the contrary, save it from complete oblivion.

Much effort has been made to test the validity of each form of GER. The research was conducted primarily on stocks traded on the New York Stock Exchange (NYSE). Moreover, shares were selected for which there was a complete trading history, i.e. liquid. And the higher the liquidity of a particular stock, the more reason to expect that the market for it will be efficient. How to conduct similar studies on illiquid assets is not very clear, and here the question remains open. Therefore, research results may be biased in favor of support for GER.

We investigated the possibility of obtaining a statistically significant gain compared to simply buying an asset at the beginning of the study period and selling it at the end of it (the “buy and hold” strategy). Transaction costs were also taken into account - commissions and slippage (or the difference in dealer prices for buying and selling an asset).

In cases where asset selection or market cross-sections were examined, risk adjustment (beta) was made to ensure that excess returns were not achieved by simply increasing risk. Here, excess return was defined as the difference between the actual investment return and the return predicted by the CAPM, taking into account the beta of a particular stock. For example, during the study period the market fell by 10%, and the beta of the stock is 1.5. Then the predicted return based on CAPM is -15%. If the actual return was -12%, then the excess return is +3%.

It should be clarified once again that market efficiency is assumed on average - over time or over a cross-section of assets. Therefore, the effectiveness test was carried out over time periods exceeding several economic cycles. There are many investment and trading strategies that provide big gains during a particular part of the business cycle, especially during the upturn.

In conditions of crisis or stagnation, these same strategies can generate losses. If a one-time sample is carried out according to some parameter, then it was carried out on the maximum available set of assets.

Checking the strong form of GER

The ability to use insider information to achieve excess returns is widely recognized. Otherwise there would be no need for laws to restrict insider trading. But the question is not as trivial as it seems at first glance. Insiders are investors who either have access to important non-public information or have the ability to systematically outperform other investors by acting on public information. Researchers identify three groups of such investors.

Corporate Insiders. These are individuals who have access to confidential data on the status of a certain company. In the US, they are required to report their transactions in that company's shares, and some aggregate data is published. These findings confirm that corporate insiders systematically provide outperformance on investments, with the effect being particularly strong when looking only at purchases. (Because such insiders are often compensated in the form of options, sales volume on average significantly exceeds purchase volume, so sales may be random, simply to realize the reward - converting it into cash.)

Analysts. Analysts at investment companies and banks make recommendations for buying/selling stocks not only based on publicly available information. Usually they meet with senior management, which allows them to assess the “human factor”, and also get acquainted in more or less detail with the company’s plans for the future. As it turned out, on average, analysts' recommendations (both in relation to the selection of stocks to include in the portfolio and in relation to the timing of purchase/sale) allow one to obtain excess returns. The effect is especially pronounced for “Sell” recommendations, which are relatively rare. This provides the basis for the ethical requirement for analysts not to trade in stocks for which the investment firm for which they work makes any recommendations.

Portfolio managers. Like analysts, managers are stock market professionals. In the course of their professional activities, managers do not directly encounter insider information, but they are as close as possible to those circles where such information can circulate. That is, if there is a group of investors who are able, although not formally being insiders, to still receive excess returns based on insider information, then this is most likely a group of professional managers.

Alas, taking into account risk, only about two thirds of managers showed excess profitability over a long period, and taking into account commissions and other costs - only one third. (Data was mainly analyzed for US mutual funds - they have a long open history of profitability.) Among other things, managers have the opportunity to systematically outstrip other groups of investors by acting on the basis of public information - it comes to them first. However, as research shows, this does not lead to the possibility of extracting excess profitability.

Exclusive access to important information provides significant excess investment returns for corporate insiders, which refutes the strong form of SER. For the group of professional analysts, the data is mixed; the possibility of obtaining excess returns is shown, but not high. And finally, the data for the group of professional asset managers supports the EER - no opportunity to obtain excess returns has been identified. Since the average investor is unlikely to outperform the manager in both access to inside information and speed of response to new information, for him the market must be efficient (by these parameters).

About performance models

Trade-off between risk and return

The concept of efficient markets leads directly to the concept of the risk/return tradeoff.

Under a moderate form of market efficiency, where prices reflect all publicly available information and therefore security prices do not contain any distortions, the alternatives are that higher returns come with higher risk. In other words, securities prices are formed in such a way that the receipt of excess returns is excluded and, therefore, differences in expected returns are determined solely by differences in the degree of risk.

Is there a trade-off between risk and return?

To illustrate, let's assume that the expected return on AT&T stock is 14%, but the company's bonds yield only 9%. Does this mean that all investors should buy AT&T stock rather than bonds, or that the firm should be financed with debt rather than equity? Of course not - a stock's higher expected return simply reflects its greater riskiness.

Those investors who cannot or do not want to take much risk will choose AT&T bonds, while more risk-averse investors will buy shares of the same company. From the company's perspective, equity financing is less risky than debt financing, and so AT&T's managers are willing to pay a higher price for equity capital in order to limit the risk the firm faces. Assuming AT&T managers:

Believe that stock and bond markets have a moderate form of efficiency

If they do not have proprietary information contrary to market expectations, then they should be (apart from tax aspects) indifferent to the choice between issuing loans and issuing additional shares - in the sense that each of these types of capital has its own price for the company, commensurate with the degree its riskiness.

The moral of this story is simple. Transactions carried out in efficient markets have zero NPV. However, markets for physical goods are generally not efficient, at least in the short term, and the sale of physical assets - machines, toothpaste or shopping centers - can generate excess income. For example, in the early days after the advent of personal computers, IBM and Apple almost monopolized the market, and the combination of high profitability with large sales volumes provided these companies with high profits. However, their high profitability values ​​attracted dozens of competitors to the market, which resulted in lower prices and lower profitability for manufacturers to a level close to normal. Thus, markets for physical goods may be inefficient in the short term, but in the long run they tend to be efficient. On the other hand, critical capital markets are almost always efficient.

The EMR and the resulting concept of the risk-return trade-off have important implications for both investors and managers. EMH indicates to investors that any optimal investment strategy includes:

Determining the acceptable level of risk,

Formation of a diversified portfolio of investments with an acceptable degree of risk, and

Minimizing transaction costs using a “buy and hold” strategy.

EMN tells managers that it is impossible to increase the value of a company through operations in the financial market. If the NPV of such operations is zero, then the value of the company can be increased only through operations in the market of material goods and services. IBM became the world leader in computer technology because it succeeded in designing, manufacturing and marketing its products, not because of any extraordinary financial decisions, and if it loses that position in the future, it will be because of poor manufacturing and manufacturing decisions. sales The prices of financial assets are generally fairly objective and decisions based on the fact that certain securities are quoted at low or high prices should be treated with great caution. When we talk about efficient markets, we usually think about the stock market, but the principle also applies to capital markets, so decisions based on assumptions that interest rates are about to rise or fall are on shaky ground.

Sometimes innovations in the securities markets result in higher-than-normal returns because new securities offering a risk-return profile not available in previously issued securities may be quoted at inflated prices. This happened in the early 1980s when Wall Street firms stripped government bond coupons to have zero-coupon government securities. However, the new securities could not be patented, so any rush of demand that supported the inflated price of the new security quickly subsided and the NPV of transactions in these securities soon fell to zero.

Financial Market Efficiency Concept

The concept of financial market efficiency is one of the central ideas of the functioning of the financial market.

A financial market is price efficient if, at any given time, prices fully reflect all available information relevant to the valuation of assets and respond immediately to new information. Since new information cannot be predicted in advance, therefore future prices cannot be predicted either. If the market is efficient, then past information about the asset and the price movement of the asset play no role in determining the future development of price dynamics.

It is customary to distinguish between three types of available information and, accordingly, three levels of market efficiency:

Weak level - Information contained in past price values ​​(price statistics);

Medium (semi-strong) level - Information contained not only in past price values, but also in publicly available sources (statistical data on prices plus publicly available information);

Strong level - All available information (price statistics plus publicly available information plus confidential information).

Thus, if the financial market is efficient, attempts to use any information are doomed to failure. The very formulation of the question of an efficient market, in turn, requires an answer to the following questions. First, it is necessary to somehow assess whether a particular financial market is efficient. Secondly, what should an investor do if the market is still efficient, and what if the market is inefficient.

Assessing the efficiency of the financial market

There are several methods for assessing the efficiency of a financial market, depending on the level of efficiency at which a particular financial market is tested.

The criterion of efficiency is the very possibility of obtaining, through the use of one or another type of information, a positive profitability when conducting operations. But that is not all. This return is typically compared to the "market return" - the return of a buy-and-hold strategy or the return of an indexing strategy.

The first strategy is based on acquiring a financial asset or several assets and holding them for some time. The second strategy - indexing - is based on building an investment portfolio that would give the same return as the assets included in some (stock) index. An investment portfolio is understood as a set of financial assets and instruments. The reason for constructing a portfolio based specifically on some index, and not individual assets from this index, is that according to modern portfolio theory (which is discussed in the next section), it is the market (index) portfolio that gives the highest return per unit of risk. In theory, a market portfolio is a portfolio in which the weights of market assets are proportional to their market capitalization. To create a theoretical market portfolio, it is necessary to use an index that most accurately reflects the dynamics of the entire market.

Then checking the efficiency of the market consists in finding the degree to which the profitability of operations based on various information exceeds the profitability of the market portfolio.

Verifying any level of performance poses a number of challenges. The point is that even if the market is inefficient, this does not mean that everyone will be able to generate income using this or that type of information. The reasons for this are as follows:

In different perceptions and giving different significance by participants to the same information;

In different interpretations by participants of the same information;

The different abilities of participants for research work.

In financial markets, we note that attempts to assess medium and strong levels of market efficiency are associated with the same problems - the presence of diverse forms of verification, different perceptions and interpretations of information by financial market participants. Therefore, although an assessment of the effectiveness of a particular market can be made, the results of the test may differ significantly from one participant to another.

Methods for analyzing financial markets

Since market efficiency is, first of all, the speed and flexibility of price in response to new information, as well as an assessment of the behavior of the security in question in the past in order to predict its dynamics in the future based on current indicators, it means that financial instruments are needed to determine its profitability as accurately as possible . Let us dwell in more detail on four types of analysis that help analysts: technical, mathematical, graphical and fundamental.

Technical analysis

This is an approach to analyzing financial markets based on identifying patterns in price movements.

More about technical analysis

Technical analysis (also called chartism; chart) states that price time series charts provide information about how investors react to new events. Understanding market psychology can help an analyst predict future trends. Under certain assumptions, well-known chartist techniques such as the trading-range break (TRB) and moving-average (MA) rules can provide a profitable trading strategy.

The TRB rule says to buy when the price rises above its previous high and sell when the price falls below the most recent low, while the MA rules are based on the idea that buys should be made when short-term moving averages exceed (cross ) long-term moving averages, and sell when the short-term ones become lower than the long-term ones. Several variations of these rules were tested on Dow Jones stock index data from 1897 to 1988, using the random walk series and the GARCH model as benchmarks. Both trading rules generated significant profits: sell orders were followed by price declines of an average of 9%, and buy signals were followed by price increases of an average of 12% (on an annualized basis). Unfortunately, success in applying technical analysis depends entirely on the quality of the optimization method discussed above.

Technical analysis is based on the following three postulates:

The price contains everything. This means that the price reflects all the information associated with the asset or financial instrument, and therefore only the prices need to be studied;

There are some patterns in price dynamics that make it possible to generate income;

The price can have three directions: up, down and sideways. In case of movement up or down, a trend is said to exist.

The interesting thing is that at the same time the price can be in all three of these states - everything is determined by the scale of view on price dynamics.

Mathematical analysis

An approach in which all conclusions regarding further price behavior are derived based on the analysis of artificially created numerical indicators (technical indicators).

Through the tools of mathematical analysis, the accuracy of forecasting price trends in the stock market increases significantly, increasing the accuracy of their recognition and prediction, and, accordingly, the efficiency of choosing actions in this market.

Mathematical analysis makes it possible to build mathematical models in which price changes are decomposed into trend, periodic and random components, to form on their basis technical indicators of the stock market, which in terms of the reliability of forecasts of their price dynamics are superior to classical ones (which are based on a generalized, mechanistic smoothing of the dynamic series), and creating a highly effective original trading system using such indicators.

Indicators built on the basis of proposed and tested methods can be used to determine the best moments for making transactions with securities, showing whether the market conditions in each of them are favorable for entering the market, at what size of the capital fall the stop order should be triggered, whether it is necessary to close a profitable position due to the outcome of the price trend. These indicators are informative for investors operating on both short and long time horizons, provide information useful to market participants seeking to both obtain exchange rate income and insure their positions on other assets against risks, and are suitable for use in the markets of various stock instruments (including government and corporate, debt, equity and derivative securities) are finally applicable to both professional market participants, financial, investment companies, funds, and individual investors.

Graphical analysis

An approach in which conclusions regarding further price behavior are drawn based on the analysis of simple graphic elements (lines, levels, figures and prices themselves).

Postulates of graphical analysis

The division into mathematical and graphical analysis is somewhat arbitrary. For example, a level or line is also derived from the price and, in essence, is an indicator drawn by a trader using a computer pencil.

Traditionally, mathematical analysis tools include those indicators that are calculated independently by a computer based on a given formula. “Graphic indicators” are applied by the trader to the chart independently. The number of different patterns identified by analysts over several hundred years is very large.

A trader’s ability to determine with a high degree of probability when one price movement ends and another begins is the key to successful trading. And the figures of graphical analysis act as invaluable assistants when making a decision to open a position. But an effective strategy cannot be built on indicators from graphical analysis alone.

In parallel with the figures appearing on the charts, the trader takes into account the signals of Forex indicators. Indicators are programs that mathematically process price movement charts and calculate patterns of market behavior. Indicator signals help a trader understand the price dynamics of exchange instruments.

By comparing information received from financial market news with technical indicators and superimposing all this on a price movement chart, a trader can predict the behavior of a Forex instrument with a certain degree of probability.

Fundamental Analysis

This is an approach to analyzing financial markets based on the study of financial and economic information, which presumably influences the dynamics of an asset or financial instrument.

About the basics of fundamental analysis

The list of information studied can be quite long, so we will give only a few examples. When assessing the prospects of shares, the following information can be taken into account (both for previous periods of time and planned indicators): revenue, net profit, financial condition of the issuer, dividend policy and dividends paid, position of the issuing company in the market, market share, development strategy issuer and industry prospects, economic and political situation in the issuer’s country, etc. When assessing the prospects for exchange rates, export-import flows, interest rates, international investment and credit flows, the policies of central banks, the state of international money and capital markets, the political and economic situation in the world and in individual countries, etc. are taken into account.

The peculiarity of fundamental analysis is that it is extremely difficult to formalize. Of course, the techniques and methods of this analysis are quite objective, but the volume of information and the different interpretations of this information by market participants transform fundamental analysis into the category of art. Although it is worth noting that there are models that allow, by substituting numerical financial indicators, to obtain an estimated assessment of the issuer's business prospects.

The concept of market efficiency has been tested by Western researchers in practice. They came to the conclusion: the market does not have a strong form of efficiency, but at the same time we can talk about its weak form. As for the average form of efficiency, debate continues on this issue. A number of studies have found market anomalies that to some extent contradict this hypothesis. Thus, the day of the week effect was discovered, which says: the profitability of a financial instrument on Monday is usually lower than on other days of the week. The effect was observed for stocks, money and futures market instruments. Another anomaly was the small firm effect.

It lies in the fact that the profitability of small firms is greater than that of large ones in comparison with the level of their risk. Research also showed that after businesses announced quarterly earnings, windfall profits could be made by buying shares of companies with particularly good results or selling shares of companies with poor results, as the trend caused by such information continued for some time. At the same time, these anomalies should hardly be considered as strong arguments in favor of refuting weak and even moderate forms of market efficiency.

The fact is that in the noted cases, deviations in the profitability of financial assets were not so great that it was possible, taking into account transaction costs, to constantly receive higher profits than the market average. In defense of the EMN, the following can also be said: searching for assets that are undervalued or overvalued by the market requires financial costs. If this process turns out to be expensive, then the detected deviations from the asset price from its equilibrium value do not contradict the EMN.

As another criterion for market efficiency, we can consider the possibility of arbitrage operations. If arbitrage is possible on the market, then it cannot be called effective. At the same time, arbitrage transactions help restore equilibrium.

If the market is efficient, then all investors are in equal competitive conditions in relation to each other, since a significant change in the price of an asset can only be caused by the emergence of some new information that could not be foreseen with sufficient reliability in advance, and therefore it does not was included in the price.

EMN states that an investor cannot receive excess profits from operations with an asset. However, this provision should be clarified. EMN says that the investor will not be able to receive excess profits on an ongoing basis due to the fact that the market is efficient, but it does not deny the possibility of excess profits arising due to any circumstances. For example, an investor purchased shares of a certain company. The next day, a message appeared about their purchase by another company. As a rule, it is carried out at a higher price to induce owners to sell their securities. As a result, the next day the shareholder can sell his shares and receive an excess profit.

If we consider the presence of an investor in the market in the long term, then the EMN assumes that at some point he may receive a higher income, at some point he may incur losses, but over a significant period of time this sum of pros and cons will give almost zero results.

Operating efficiency of the market

Above we talked about information efficiency. There is also the concept of market operational efficiency. It shows how quickly decisions made to buy or sell an asset reach the market. Operational efficiency depends primarily on the degree of development of the financial market infrastructure, as well as established forms of interaction between clients and brokerage companies.

For example, a dealer in the GKO-OFZ market will have an advantage over the client if the terms of the contract do not provide for the opportunity for the client to give orders to the broker during the session itself, but only the day before. As a result, the client is deprived of the ability to quickly respond to changes in the current environment. Thus, if the market is not operationally efficient, then there are always investors in it who have an advantageous position compared to other trading participants.

If a market is not operationally efficient, it will not be informationally efficient. As a result, opportunities open up for obtaining excess profits due to faster transmission of orders for transactions to the market, even with equal access to information for all investors. In addition, it is equal access to information in conditions of operational inefficiency that will provide investors with part of the excess profits.

Modern interpretation of market efficiency

The concept of an efficient market continues to play a dominant role in modern Financial Theory. However, this concept is being revised. First of all, this refers to the assumption of homogeneity of all investors in terms of their goals and the rationality of their decisions. In particular, the concept of an efficient market does not take into account that investors in the financial market have different investment horizons ("long-term" and "short-term" investors), who react only to information related to their investment horizon (the so-called "fractality" of the interests of participants) . The presence of these two categories of investors in the market is necessary for market stability.

Based on this range of ideas, the concept of fractality (fractionality) of the market arose, the foundations of which were laid in the works of G. Harst (1951) and B. Mandelbrot (1965). This theory makes it possible to explain, among other things, the phenomenon of the collapse of stock markets, when there is not just a downward movement of prices, but a market collapse occurs, in which the prices of nearby transactions are separated by an abyss. As, for example, it happened during the default in Russia in 1998. We don’t want this topic to be cluttered, so we will look at it in more detail in a separate issue of our newsletter.

The above theoretical considerations also have a purely practical implementation. As examples, consider the use of mechanical trading strategies and index funds.

As we noted, the modern stock market is not, strictly speaking, efficient, so new information is gradually reflected in the price of the asset. As a result, a price trend is formed. It can be used to make a profit, provided that the asset price movement is detected in a timely manner. Similar methods are used by some mechanical securities trading systems. To complete the picture, we note that there is another type of mechanical trading strategy that operates on the opposite principle - the purchase of an asset begins not when it begins to grow, but when its price falls below a certain level; and, accordingly, sell when its price rises above a certain value.

The efficient market hypothesis gave impetus to the emergence of the first index funds, the portfolio of which reproduced a certain stock index, i.e. contained a set of shares included in the selected index. One of the first funds was "The Vanguard Index Trust-500 Portfolio" (1976), created on the basis of the Standard & Poor's-500 index (USA), which represented shares of 500 companies (400 industrial, 20 transport, 40 consumer and 40 financial This approach implements the idea of ​​passive management of a well-diversified portfolio of securities.

This approach does not require highly qualified analysts; in addition, transaction costs that inevitably arise in the case of active portfolio management are minimized. Despite the fact that passive portfolio management methods are not the limit of the skill of portfolio managers, index funds nevertheless show good results.

If we look at the statistics on the profitability of Russian mutual funds for 2006, it turns out that not many funds showed better results than the profitability of index funds. Moreover, if we look at the results for 2005 and 2006, only a few over the course of 2 years showed results better than the returns of index funds, and no one showed significantly better results. This is because many funds use risky strategies, which allows them to get better results when they are lucky. But not a single mutual fund has yet managed to consistently show results significantly better than the returns of index funds, precisely due to the relative efficiency of the stock market.

Ecapital market efficiency

The purpose of the capital market is the efficient redistribution of funds between lenders and borrowers. Individuals and firms may have excess investment opportunities in production with an expected rate of return that exceeds the market borrowing rate, but do not have enough cash to use them all for their own purposes. However, if the capital market exists, they can borrow the money they require.

Lenders who have excess funds after exhausting all their productive capacity at a rate of return greater than the borrowing rate are willing to lend them because the lending rate is higher than they could otherwise earn. Thus, both lenders and borrowers are wealthy if efficient capital markets facilitate the reallocation of funds. The lending/borrowing rate is used as an important piece of information by each manufacturer, who will undertake a project as long as the rate of return of the least profitable project is at least equal to the cost of attracting external funds (i.e., the lending rate).

Thus, a market is called allocatively efficient if prices are determined from the equality of the minimum effective rate of return for all producers and accumulators. In a distributed efficient market, scarce savings are optimally allocated to productive investments to the benefit of everyone.

Describing efficient capital markets is useful primarily to compare them with perfect capital markets. The following conditions are necessary for a perfect market:

Frictionless markets, i.e. there are no transaction costs, all assets are perfectly divisible and liquid, there are no restrictive rules;

The presence of perfect competition in commodity markets and securities markets. In commodity markets, this means that all producers offer goods and services at a minimum average cost; in the securities market, this means that all participants are dealers;

The market is informationally efficient, i.e. the information is free and is received simultaneously by all participants;

Operational efficiency

Capital market efficiency is much broader than the concept of perfect markets. In an efficient market, prices respond fully and immediately to all relevant information. This means that when assets are sold, prices accurately reflect the allocation of capital.

To show the difference between perfect and efficient markets, let's relax some of the assumptions in the definition of a perfect market. For example, the market will remain efficient if it ceases to be frictionless. Prices will also react perfectly to all kinds of information if sellers are forced to pay a brokerage commission, or capital is not infinitely divisible. Moreover, a product market will remain efficient in the absence of perfect competition. Hence, if a firm can earn monopoly profits in a product market, the efficient capital market will determine an asset price that fully reflects the present value of the expected stream of monopoly profits. Thus we can have inefficient allocation in commodity markets, but an efficient capital market. Finally, information can be paid for in an efficient market.

Capital market efficiency refers to operational and distributional efficiency. Asset prices are accurate indicators in the sense that they react fully and instantly to all kinds of relevant information and are used to direct capital flows from savings to investments with the highest rate of return. A capital market is operationally efficient if the intermediaries facilitating the passage of the above flows do so for a minimum amount of money.

Research on the effectiveness of financial markets

In the international scientific and educational laboratory of financial economics, under the leadership of Sprenger Carsten, research was carried out in the field of financial economics, in particular, the problem of the efficiency of financial markets and the problem of corporate governance was raised. This project was represented by four subprojects within two areas of research.

The first area examined financial markets, including the pricing of derivatives and the microstructure of financial markets. The size and share of specific risk (as opposed to systemic risk) in the price of an option on a company's share and the question of the role of liquidity of liquidity information in trading financial instruments were considered.

The second area is related to corporate governance issues. The following issues were considered: the role of political proximity of participating countries in international acquisitions and mergers of companies, and the effectiveness and financial sustainability of government acquisitions in Russia.

Object of study - financial markets

The focus of work in the first direction “Financial Markets” is aimed at studying hidden and transparent liquidity in securities markets with informed provision of liquidity and the pricing of options with regular jumps in the price of the underlying asset. The subproject “Hidden and Transparent Liquidity in Securities Markets with Informed Liquidity Provision” (first subproject) examines a model of trading in financial instruments in which informed agents act on both sides of the market - as consumers and providers of liquidity.

A fundamentally new aspect that the model includes is that it takes into account both the choice of informed traders between the supply and consumption of liquidity, and the intensity with which each trader acts within the framework of the chosen strategy. Particular attention is paid to the impact of hidden liquidity on the trading costs of uninformed traders and the information efficiency of prices. The subproject “Pricing options with regular jumps in the price of the underlying asset” (third subproject) is related to the problems of option pricing. This area considered the pricing of options with regular jumps in the price of the underlying asset.

These issues are relevant to the Russian market, and they have attracted even more attention with the increase in global financial instability.

The purpose of studying the efficiency of financial markets

Subprojects set themselves a number of goals.

Examine the impact of hidden liquidity on market quality using a model of financial instruments trading in which informed agents act on both sides of the market - as consumers and providers of liquidity.

Explore political proximity in international mergers and acquisitions. Specifically, to examine the role of political proximity in determining the initial premium offered by a buyer in an international transaction.

Identify the size and specific weight of a company’s specific risk (as opposed to systemic risk) in the price of an option on a given company.

Financial market research results

The tasks assigned to the researchers within the framework of this project were fully completed. Models have been developed that characterize a number of relevant aspects of financial markets and corporate governance. Within the framework of projects directly devoted to the study of the Russian economy using modern methods of financial economics and econometrics, databases were collected, with the help of which the models and main hypotheses of the projects were analyzed and tested.

As a result of the first subproject, it was revealed that hiding liquidity supplied by informed traders has a positive effect on market quality. The increased competition resulting from the migration of informed traders to the supply side of liquidity dominates the increased profits associated with hiding their bids. When liquidity is transparent, fewer informed agents move to the liquidity supply side and instead they trade as liquidity consumers; competition is less intense and market quality is lower. The quality of a market with hidden liquidity is higher, since more informed agents come to the side of liquidity providers, and they trade more aggressively as liquidity providers than they would trade as liquidity consumers: that is, the choice of strategy type and the choice of trading intensity determine the quality of the market in interaction.

The second subproject found strong and consistent evidence that the initial premium in cross-border transactions is negatively related to political proximity. Moreover, the size of the acquiring and acquired firms weakens this effect. Large size affects both the ability of companies to gain influence among governments and their importance on the political agenda. Also, the effect of political proximity decreases when the level of political restrictions of the home country that the government faces when carrying out its foreign policy activities is high.

The result of the third subproject was the proposal of a simple solution for the price of a European call option on a stock, which is subject to regular jumps. We illustrate the usefulness of our model by showing its predictive power compared to the Black-Scholes model on a sample of 5 low-dividend stocks. Returning to firm-induced uncertainty and its drivers, we look at a sample of 30 firms over 1999–2010, where one-eighth of stock return volatility is due to the expected jump on earnings day. A study of the distribution of expected jump size for 1999–2010 on a sample of 30 companies found that company-induced uncertainty is higher during technology shocks and decreases with decreasing company size and market-to-book ratio. The relative contribution of the jump component to the variation in expected returns is smaller for shares of retail companies. We also found a slight decrease in the jump during the crisis. In addition, the liquidity of derivatives and the high market-to-book ratio reduce the relative impact of company-related uncertainty on option pricing.

Application of financial market research

Within the framework of academic goals, the projects have various prospects for further research. In particular, in the first subproject, the developed model considers secrecy/transparency as an attribute of market architecture, which is directly applicable to cases of mandatory transparency (as, for example, in the case of the Australian Background Exchange) and is important for regulators who are considering this policy. Our work suggests that a more appropriate policy would be to allow liquidity to be completely hidden without deprioritizing it (as occurs in mixed markets where orders can only be partially hidden, with liquidity disclosure favored over concealment).

Research in the second subproject showed that, although the premium offered by the buyer is often not recognized, it is an important element of the acquisition process. This paper describes the role that governments can play in merger or acquisition negotiations and how they influence companies' actions by providing access to relevant information or useful connections. It shows that international relations matter for cross-border acquisitions and that political relations between countries can determine the behavior of governments towards foreign companies. Proximity (distance) causes positive (negative) discriminatory behavior, such as allowing easy (or restricting) access to political and business circles, and likely makes trade diplomacy efforts more (less) effective in gaining buyer advantage.

The third project offers a simple solution to the price of a European call option on a stock that is subject to regular fluctuations. We illustrate the usefulness of our model by showing its predictive power compared to the Black-Scholes model on a sample of 5 low-dividend stocks. Returning to firm-induced uncertainty and its drivers, the subproject looks at a sample of 30 firms over 1999–2010, where one-eighth of stock return volatility is due to the expected jump on earnings day.

A study of the distribution of expected jump size for 1999–2010 on a sample of 30 companies found that company-induced uncertainty is higher during technology shocks and decreases with decreasing company size and market-to-book ratio. The relative contribution of the jump component to the variation in expected returns is smaller for shares of retail companies. A weak decrease in the jump during the crisis was also found. In addition, the liquidity of derivatives and the high market-to-book ratio reduce the relative impact of company-related uncertainty on option pricing.

Sources and links

Sources of texts, pictures and videos

ru.wikipedia.org - a resource with articles on many topics, a free encyclopedia Wikipedia

youtube.com - YouTube, the largest video hosting in the world

marketanalysis.ru - information portal about mathematical instruments of the stock market

enc-dic.com - encyclopedias and dictionaries

mirslovarei.com - collection of dictionaries and encyclopedias

dictionary-economics.ru - economic dictionary

cfin.ru - information portal on financial management

coolreferat.com - collection of abstracts

vuzlib.org - economics and law library

student.zoomru.ru - collection of student works

digest.subscribe.ru - website dedicated to economics and finance

isd82.narod.ru - electronic library

ronl.ru - abstracts, diplomas, term papers

refoteka.ru - the largest collection of abstracts, reports, essays, coursework, diploma and tests

univer5.ru - bank of abstracts, essays, reports

quote.rbc.ru - website dedicated to the stock market

referatwork.ru - collection of abstracts

biz.liga.net - world business news

economy-ru.com - website dedicated to business, entrepreneurship and e-commerce

be5.biz - information portal of the Institute of Economics and Law of Ivan Kushnir

seinst.ru - information portal of the Institute of Economic School

center-yf.ru - information portal dedicated to financial management

strategii.net - a site dedicated to Forex market strategies

hse.ru - website of the National Research University Higher School of Economics

knigi-uchebniki.com - financial portal

dslib.net - dissertation library

video.google.com - search for videos on the Internet using Google

yandex.ru - the largest search engine in Russia

video.yandex.ru - search for videos on the Internet via Yandex

images.yandex.ru - image search through the Yandex service

Application links

chrome.google.ru - browser for working with websites

hyperionics.com - website of the creators of the HyperSnap screenshot program

An efficient securities market is formed if investors have extensive and easily accessible information and all of it is already reflected in the prices of securities. The concept of an efficient market was developed based on the works of Maurice Kendall, who in the early 1950s. found that changes in stock prices from period to period are independent of each other. Before this, it was assumed that stock prices had regular cycles. Research has shown that, for example, the correlation coefficient between the price change of any day and the next day is hundredths. This indicates a slight trend, such as further price increases following the initial increase. Independent price behavior is to be expected only in a competitive market.

According to the efficient market hypothesis, it is impossible to make accurate forecasts of price behavior. According to this hypothesis, the high efficiency of the securities portfolios of some firms compared to others is explained not by the competence of managers, but by pure chance.

Based on the US stock market crash that began on October 17, 1987, six lessons on efficient markets have been developed)