Financial Markets and Financing - Financial Markets and Securities Offerings - Insider Trading and Efficient Markets Hypothesis
7 important questions on Financial Markets and Financing - Financial Markets and Securities Offerings - Insider Trading and Efficient Markets Hypothesis
What is the definition of 'Insider Trading'?
Why is it illegal and what is its effect?
Insider Trading is illegal because it undermines investor confidence in the integrity and fairness of the financial markets.
What does the 'Efficient Markets Hypothesis' states regarding 'current stock prices'?
- 'current stock prices' immediately and fully reflect all relevant information. Hence, the market is continuously adjusting to new information and acting to correct pricing errors, and securities prices are always in equilibrium.
- the price equals its fair value as perceived by investors.
What does the 'Efficient Markets Hypothesis' states regarding 'returns'?
- it is impossible to obtain abnormal 'returns' consistently with either fundamental or technical analysis.
- the expected return of each security is equal to the return required by the marginal investor given the risk of the security.
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The 'Efficient Markets Hypothesis' has three forms (versions). What are they?
- Strong Form
- Semi-strong Form
- Weak Form
What does the Strong Form of the 'Efficient Markets Hypothesis' stand for?
All public and private information are instantaneously reflected in securities prices. Thus, insider trading is assumed not to result in abnormal returns.
So, the Strong Form applies when everything (= the two statements) that is assumed applies.
Only the Strong Form has been refuted by empirical data.
What does the Weak Form of the 'Efficient Markets Hypothesis' stand for?
Current securities prices reflect all recent past price movement data, so the technical analysis will not provide a basis for abnormal returns in securities trading.
What is the effect of the possibility that all information is not reflected in security prices?
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