Efficient securities market. Analysis of the effectiveness of securities

13.11.2021 | Technique

Within the framework of the neoclassical approach, there are two concepts of market efficiency, representing quality from different angles
MARKET EFFICIENCY IN DIFFERENT ANGLES REPRESENTING
QUALITY OF THE FUNCTIONING OF THE STOCK MARKET. THIS IS FIRST
THE CONCEPT OF A MARKET OF PERFECT OR IMPERFECT COMPETITION.
PERFORMANCE CRITERION - THE NATURE OF COMPETITION AND
IT CONDITIONS FOR MAXIMIZING PROFIT. ACCORDING TO THIS
IN THE CONCEPT OF THE SECURITIES MARKET (SEC) REFER TO MARKETS
PERFECT COMPETITION.

And the second neoclassical concept is the market efficiency hypothesis formulated by E. Fama. Efficiency criterion here

AND THE SECOND NEOCLASSICAL
CONCEPT - HYPOTHESIS
MARKET EFFICIENCY,
FORMULATED by E. FAMA.
PERFORMANCE CRITERION HERE
PERFORMING QUALITY
PRICING BASED ON ACCOUNTING IN
PRICE OF FINANCIAL ASSETS
INFORMATION OF VALUE
FOR ITS FORMATION. IN THIS CASE
SOMETIMES THEY TALK ABOUT INFORMATION
EFFICIENCY OF FINANCIAL MARKETS

The balance of supply and demand can be achieved both in the market
imperfect competition, and in a market that is not
effective within the framework of the neoclassical hypothesis about its effectiveness. IN
within the framework of the latter, the stock market, like the financial market as a whole,
appears as a market with information asymmetry. And under
market efficiency refers to the efficiency of pricing
financial assets. For the stock market, this
efficiency of securities pricing, i.e. rights
property.
Within the framework of the institutional approach, the concept of an efficient market
relies on the minimization of transaction costs as the price of transactions lying
at the heart of the pricing mechanism for goods. Transaction costs -
these are, in the institutional interpretation, market imperfection prices.
Qualitative criterion of market efficiency - non-personalized
the nature of the exchange. Transaction costs of zero would mean
the existence of a perfect market, (i.e. a market of perfect competition)
and, at the same time, would mean in accordance with R. Coase's theorem
efficient allocation of resources under clear certainty
property rights, the redistribution of which could not change
distribution of resources in the economy.

Market efficiency has been placed at the center of market efficiency
institutional mechanism, i.e. the ability of institutions to provide
efficient pricing based on equal terms of exchange and
minimizing transaction costs. In this context, approaching
market efficiency in the sense that provides
institutional approach is necessary condition achieve it
efficiency within the framework of various concepts of the neoclassical approach.
“Economic entities have incomplete information and develop
subjective models as a tool of choice. Transaction costs
arise because information has a price and is asymmetrically
distributed among the parties of the exchange. As a result, the result of any
actions of players to form institutions for the purpose of restructuring
relationships will increase the degree of market imperfections”.
Therefore, the degree of efficiency of the financial market has
quantitative characteristics. First of all: the level of transactional
costs in the economy to attract investment; cost level
functioning of financial markets; level of financial
operations of economic entities both on the open market and as a result of
their internalization within integrated corporate structures. Otherwise
saying, "the efficiency of an economic market can be measured by the degree
according to which the competitive structure through arbitrage and
effective information feedback mimics or approximates
conditions of a structure with zero transaction costs.

understanding the efficiency of the market allows us to substantiate from a new perspective the problem of the efficiency of the stock market on

UNDERSTANDING MARKET EFFICIENCY
ALLOWS TO JUSTIFY FROM A NEW PERSPECTIVE
STATEMENT OF THE PROBLEM OF
EFFICIENCY OF THE STOCK MARKET ON
MACROECONOMIC LEVEL, WHICH
TRADITIONALLY ANALYZED IN THE ASPECT
OVERVALUATION, APPEARANCES
"MARKET BUBBLES" AND
CROSS-BORDER MOVEMENT OF CAPITAL,
DUE TO DIFFERENT QUALITY
ASSET VALUATION AT NATIONAL
MARKETS. IN ADDITION, DEPENDENCE
ECONOMIC GROWTH FROM QUALITY
FUNCTIONING OF SUCH INSTITUTION,
HOW RZB AND EFFICIENCY
PRICING FOR ITS ASSETS ALSO
IT APPEARS IN THE LINE OF SUCH
METHODOLOGICAL APPROACH AND FOCUS
APPLIED PROCESS ANALYSIS
FINANCIAL GLOBALIZATION.

"Market bubble" in the stock market means the excess of market
share prices over their fundamental (intrinsic) value. expectations
investors regarding rising prices and their belief in short
sales lead to a steady increase in stock prices relative to their
fundamental value. The existence of such a “bubble”
causes retaliatory new share issues placed under these
inflated prices, which leads to an increase in the Tobin coefficient (Tobin´s Q)
and causes, in turn, paradoxical as it may seem, the growth
real investment. Empirical confirmation of the key
provisions of the theoretical model of such a relationship: with the growth of expectations
increase in prices, the volume of new issues increases, the Tobin coefficient
and real investment. Thus, the "market bubble" is formed
influenced by investor expectations and imperfection of constraints
speculative game based on short sales, as supported
the response of the real sector - the offer of securities for
inflated prices and growth in real investment due to the emerging
undervaluation of real assets. Because these consequences are
some time are obviously positive in the real sector and
cause an objectively conditioned increase in investment
market capitalization of companies, then the existence of a "market bubble"
supported for some time by this mechanism of forward and backward
links between the stock market and the real sector of the economy.

Generalization of theoretical provisions leads to a number of conclusions:
1. Financial institutions as norms economic activity capable of leading to
allocation inefficiency of the market.
2. Deformation of the mechanism of distribution of resources in the economy can manifest itself in
inefficiency of pricing in the stock market, growth of transaction costs
in the financial and economic system as a whole, crises as a way (mechanism)
self-regulation.
3. Crises in the economic (including financial) system, on the one hand,
are an indicator of the inconsistency of the institutional system of the economy (or its
individual sectors) to the goals and mechanism of its functioning, and on the other hand,
lead to the forcible restoration of pricing efficiency, as well as to
change of institutions (norms) at all levels of the system.
4. The efficiency of the stock market is determined by the level of its development as a market
Institute and interaction with other institutions of the economy.
5. High transaction costs are an inherent feature, a feature
emerging markets. One of the most obvious manifestations of imperfection
markets - significant differences in the price of the same product, and therefore,
arbitrage opportunities. The price volatility of the spot market (current,
cash market) increases the uncertainty of markets in the future. But the opposite is also true:
uncertainty about the future state of the market affects the volatility of the current
market conditions. It follows that the institutional changes that
allow to reduce uncertainty in the future, as well as create a mechanism for interconnection
(adequate response) between the current and future state of the market, that is
the creation of risk-sharing institutions is a factor in increasing
market efficiency both from the point of view of the neoclassical approach and
institutional approach (reducing transaction costs as payment for
market imperfections).

An empirical study of the efficiency of the Russian stock market is based on the market efficiency hypothesis

EMPIRICAL INVESTIGATION OF THE QUESTION OF
THE EFFICIENCY OF THE RUSSIAN STOCK MARKET
BASED ON THE MARKET EFFICIENCY HYPOTHESIS (EMN).
THE CONCEPT OF MARKET EFFICIENCY
AN EXCEPTIONALLY IMPORTANT PLACE AS IN THE FINANCIAL
THEORY AND PRACTICE. CAPITAL ASSETS MODEL
PRICING MODEL (CARM) SHOWS HOW MUCH
INFORMATION ABOUT FUTURE PAYMENTS IS IMPORTANT
ASSET PRICE DETERMINATION. IN GENERAL
INVESTORS IN THE MARKET ARE ASSUMED TO HAVE
VARIOUS INFORMATION REGARDING FUTURE
PAYMENT STREAMS FOR SHARES (FINANCIAL ASSETS).
EQUILIBRIUM IN THE MARKET UNDER RATIONAL EXPECTATIONS
IS THAT PRICES AGGREGATE ALL
AVAILABLE INFORMATION. ACCORDING TO E. FAMA,
A MARKET IS EFFICIENT IF MARKET PRICES
COMPLETELY AND INSTANTLY REFLECT EVERYTHING
INFORMATION OF MEANING TO THEM
FORMATIONS.
E. FAMA HAS DISTRIBUTED 3 FORMS (GRADES) OF EFFICIENCY
MARKET. THE MARKET HAS A WEAK FORM OF EFFICIENCY
(WEAR-FORM), IF DYNAMICS OF RATES FOR THE PAST
THE PERIOD DOES NOT ALLOW TO FORECAST THE FUTURE
PRICE SIGNIFICANCE AND THEREFORE PURCHASING DECISIONS
OR SALE OF SECURITIES ACCEPTED ON THE BASIS
METHODS OF TECHNICAL ANALYSIS DO NOT ALLOW
SYSTEMATICALLY GET DIFFERENT FROM NORMAL
(MARKET AVERAGE) PROFIT.

Market Efficiency is

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

Why does the market need to be efficient? Three reasons are usually given for the explanation:

1. A large number of competing independent investors operate on the market, each of which analyzes and evaluates assets independently.

2. New information enters the market randomly.

3. Competing investors try to quickly bring asset prices into line with incoming information.

This adjustment of the asset's price to new information in an efficient market is not biased, although it may be imperfect. This sounds convoluted, but is exact 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, but at the same time, on average (both in time and in assets), the estimate will be correct (unbiased), and predict in advance when it will be overestimated, and when it is underestimated, it is impossible.

Bringing prices in line with incoming information requires the presence of a certain minimum number of investors in the market, constantly analyzing information and making contracts in accordance with the results of the analysis. The greater the number of such investors present in the market, the more effective it is. And a large number of aggressive investors trying to immediately bring the price of an asset into line with new information means a large volume trade. So the efficiency of the market grows with the growth of volumes. In addition, the market can be efficient in relation to some assets (liquid), and at the same time - inefficient in relation to others (low-liquid).

Since new information is quickly reflected in the price in an efficient market, the current 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 profitability, embedded in the price of the asset, 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 build either a trading system or an investment strategy that could provide more than what the market expects in accordance with the risk of investment.

In order to answer the question of whether the real stock market is efficient, it was necessary to formulate the Market Efficiency Hypothesis (EMH) and look for evidence that it is true. Looking ahead, it can be noted that many studies support GER, but many also refute it, so the question of the effectiveness of the real market remains open. Since the question is extremely important from the practical side, more attention will have to be paid to it.

Market Efficiency Hypothesis (EMH)

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

1. Weak form: current asset prices take into account all information about the past actions of market participants. That is, the history of transaction prices, quotes, trading volumes is taken into account - in general, all information related to asset trading. It is generally accepted that developed markets are weakly efficient. This implies the pointlessness of using technical analysis, since it is based solely on market history.

2. Medium form: current asset prices take into account all publicly available information. The medium form of ERT includes the weak one, because market information is publicly available. In addition, information was taken into account on the production and financial activities of companies that issue securities and on the general political and economic situation. That is, all information about the political structure, economic statistics and forecasts, information about profits and dividends of corporations - everything that can be gleaned from publicly available sources of information is taken into account. The average form of GER implies the meaninglessness of making investment decisions based on new information that has appeared (for example, publications financial reporting organizations for the next quarter) - this information is included in the prices immediately after it became publicly available.

3. Strong form: current asset prices take into account all information from both public and closed sources. In addition to publicly available, non-public (insider) information is also taken into account, available, for example, from managers of some firms about the prospects for this organizations. The strong form includes both the weak and medium forms. , effective in a strong form, can be called perfect - it is understood that in general all information is publicly available, free of charge, and comes to all investors at the same time. In such a market, it is pointless to make investment decisions even on the basis of confidential information.

Many efforts have been made to test the fairness of each of the forms of GER. Most of the research has been done on stocks traded on stock exchange NYSE(). Moreover, stocks were selected for which there was a complete trading history, i.e. liquid. And the higher liquidity 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 findings may be biased in favor of GER support.

We studied 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). Transactional expense- commission and slippage (or the difference between dealer prices for buying and selling an asset).

In cases where asset selection or market slices were examined, a risk adjustment (beta) was made to ensure that excess returns were not provided by a simple increase in risk. Here, the excess return was defined as the difference between the actual return on the investment and the return predicted based on the CAPM, taking into account the beta of a particular stock. For example, in the study period the market is down 10% and the beta of the stock is 1.5. Then the CAPM-based predicted return 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 to be on average - over time or over a slice of assets. Therefore, the effectiveness test was carried out on periods over several economic cycles. There are many investment and trading strategies that offer big wins at any given point in the business cycle, especially on the upswing. In conditions of crisis or stagnation, these same strategies can generate losses. If a one-time sampling is carried out for some parameter, then it was carried out on the maximum available set of assets.

Checking for a weak form of GER

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

1. Statistical checks. If the market is efficient, then there should be no correlation between asset returns in different time intervals, i.e. autocorrelation coefficient of asset return rt,t-n ( correlations returns in the selected interval t and , separated from the first one by n intervals for different n) should be close to zero. Studies on a wide range of assets have confirmed that this is the case - there were no statistically significant deviations from zero for the 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 grows in the selected interval, a plus sign is assigned to it, if it decreases, a minus sign is assigned. Then the price over time looks something like this: “+-++++--++-----++++++-+...” ( grows on the first day, decreases on the second, then grows four consecutive days, 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).

2. Trading strategies based on technical analysis. Two difficulties arose here. The first was that many technical analysis recommendations are based on a 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 trading strategies can be invented almost infinitely, 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, the costs eat up all the additional winnings. But still, the results are not entirely unambiguous - several recent studies have shown the possibility of obtaining a win for some strategies. In general, research confirms the widespread belief that in a liquid market, known strategies do not give a win, but one can hope to “beat” the market by inventing a new strategy. This can provide super-returns until a significant number of investors follow it.

Conclusions. Developed markets are weakly efficient, but there is some data showing the potential for inefficiency with respect to some trading strategies developed from technical analysis.

Checking the average form of GER

1. Publication of financial statements. Studies have shown that you can generate excess returns on investments (positive) by buying stocks after the release of quarterly reports in which profit The firm turns out to be higher than the average expected by Analystami. Moreover, if such a discrepancy exceeds 20%, then the excess profit in avg. profit exceeds commission costs. According to available statistics, 31% of above-average growth occurs in the period before the announcement, 18% on the day of the announcement, and 51% after the announcement day (the effect usually wears out within 90 days). If the data is worse than expected (negative surprise), then the market reacts much faster, and it remains unclear whether you can get excess returns by shorting such stocks.

2. Calendar effects. It was noticed that in the USA at the end calendar year many investors are selling the stocks that they have suffered the most losses in the past year in order to get tax deductions. In the first week of January (mostly on the first trading day), these same shares are bought back. That is, the market at the end of the year goes down abnormally, and at the beginning of the year it grows abnormally (January effect). Studies have shown that such an effect does exist, and it is greater, the smaller the size of the organization. Moreover, it is so large that it significantly covers transaction costs. (In an efficient market, there would be enough investors buying on credit stocks at the end of the year and selling at the beginning to eliminate the anomaly.) Another explanation for the January effect is reporting window dressing. managers investment funds, as they are wary of showing on their balance sheets assets that have incurred a significant loss.

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

3. 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 a separate corporations- price changes are significant and occur very abruptly. Can this be used to generate super profits? As it turned 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 takes place at a time when the market is closed, it opens at prices that fully take into account the news (of course, on average), and additional profitability cannot be extracted. If the publication takes place during a live market, price adaptation takes place within approximately one hour. A. Stock split. Contrary to popular belief, the publication of a decision on a share split (the exchange of each old share of a company for several new ones in order to reduce the share price and thereby increase liquidity) does not allow extracting additional profitability.

(primary IPIO shares). The organization from closed becomes public, placing its shares on the stock exchange for the first time. On average, the share price rises by 15%, so taking part in IPO profitable. But almost all the increase occurs on the first day. bidding. So, on average, the best strategy is to subscribe to the offered shares and sell them on the first day. bidding. Investors who bought stocks on the market on the first day of trading lose relative to the market on average, so research in this area confirms the fairness of the average form of GER (as for splits).

Passage of the listing. Since the publication of the decision of the organization to enter stock exchange and before the announcement of the passage listing the average yield is slightly above the market, after that - below the market.

4. Existence of indicators that could be used to forecast future market returns. In an efficient market, the best estimate of future returns is historical returns over the long run, and the aforementioned indicators it is impossible to distinguish. It turned out that in the real market such indicators everything is just like that. You can use the average market dividend yield (the ratio of dividend to share price) - the higher it is, the higher the future yield of the market as a whole. In addition, it was found that the spread between the average yield of Aaa and Baa treasuries (according to Moody's), as well as the time spread between long-term and 1-month bonds, can be used to predict the returns of stocks and bonds.

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

5. 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 line of the stock exchange (LFR). The purpose of the research was to find such indicators that would allow to detect undervalued or overvalued assets, taking into account the risk. It should be pointed out that such studies test the combined hypothesis (market efficiency + CAPM fairness), since the risk of an asset is estimated by CAPM. Therefore, the ability to indicate assets that are not on the LFR indicates either market inefficiency 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 did not lead to the conclusion of market inefficiency or showed mixed results. However, some indicators were also found, following which allows you to extract a profitability higher than the market one - they are listed below.

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

market firm. Small company stocks are systematically undervalued. The effect is enhanced if among such stocks one chooses stocks with low P/E. It should be noted that for the shares of small companies, transaction costs are much higher than for large ones, so the gain can only be obtained over a sufficiently long period (it was found that for shares USA it's still less than a year old.

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 being the strongest of those listed. 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 ERT for developed markets are mixed. Studies have shown the effectiveness of the market in relation to almost all significant events, both in the world and within the organization. At the same time, the possibility of predicting the future profitability of the stock market using indicators such as dividend yield or bond market spread has been established. Calendar effects, market response to surprises in corporate quarterly reports, and the possibility of using indicators such as P/E, market capitalization and P/BV. At the same time, the degree of market inefficiency is almost always small (taking into account transaction costs), and it is not clear whether it will persist in the future - according to some reports, over time the market becomes effective in relation to an increasing number of tests.

Checking for a strong form of GER

Usability undisclosed information to obtain 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 sight. Insiders are investors who either have access to important non-public information or who have the ability to systematically outperform other investors by acting on public information. Researchers distinguish three groups of such investors.

1. Corporate insiders. These are persons who have access to confidential data on the state of a particular company. IN USA they are required to report on their transactions in the shares of this organization, and some aggregated data is published. This data confirms that corporate insiders systematically generate excess returns on investments, especially if only purchases are considered. (Because these insiders are often rewarded in the form of options, the volume of sales on average is much higher than the volume of purchases, so sales can be occasional, just to realize the reward - to convert it into cash.)

2. Analysts. Analysts investment companies and banks make recommendations for buying / selling shares not only on the basis of publicly available information. They usually meet with top management, which allows them to assess the "human factor", and also get acquainted with the plans of companies for the future in more or less detail. As it turned out, on average recommendations Analystov(both in terms of choosing stocks to include in the portfolio, and in terms of timing for buying / selling) allow you to get excess returns. The effect is especially pronounced for recommendations “Sell”, which are relatively rare. This serves as the basis for the ethical requirements for Analystam not engage in transactions with shares for which the investment institution in which they work makes any recommendations.

3. Managers portfolios. Like analysts, managers are stock market professionals. During its professional activity managers do not directly face confidential information, however, are located as close as possible to those circles where such information can circulate. That is, if there is a group of investors who, although not formally insiders, can still receive excess profits based on inside information, then this is most likely a group of professional managers. Alas, taking into account risk, only about two-thirds of managers showed excessive returns over the long period, while taking into account commissions and other costs, only one-third. (We mainly analyzed data on US mutual funds - they have a long open history of profitability.) Among other things, managers have the opportunity to systematically outperform other groups of investors, acting on the basis of public information - they receive it in the first place. However, this, as studies show, does not lead to the possibility of extracting excess profit.

Exclusive access to sensitive information provides a significant excess return on investment for corporate insiders, which belies the strong form of ERT. For the group of professional Analysts, the data are mixed, the possibility of obtaining excess profits is shown, but not high. Finally, data for a group of professional asset managers support the ERT—there is no opportunity for excess returns. Since the average is unlikely to outperform the manager both in access to insider information and in the speed of responding to new information, the market must be efficient for him (by these parameters).

Financial Market Efficiency

The concept of the efficiency of the financial market is one of the central ideas of the functioning of the financial market. We will consider the following range of issues: the ratio of investment value and the market rate; efficient market hypothesis; weak, medium and strong forms of market efficiency; neoclassical theories; case studies - mechanical trading strategies, index funds; CFA exam questions.

As we noted, a real boom in the Theory of Finance occurred with the development of probabilistic methods that arose along with the assumption of uncertainty in price, demand, and supply. In the first half of the 20th century, starting with the dissertation of L. Bachelier, a series of works appeared in which an empirical analysis of various financial characteristics was carried out in order to obtain an answer to the question of the predictability of price movements. Since that time, the hypothesis that the logarithms of prices behave like a random walk has been actively discussed (their increments are independent random variables). The random walk hypothesis was not immediately accepted by economists, but later it led to the concept of an efficient market (EMH - efficient market hypothesis).

One of the goals of investment analysis is to estimate the fair value of securities, the so-called investment value.

Investment value of a security is the present value of expected returns in the future, estimated by well-informed and highly qualified Analysts.

Consider an idealized market with the following properties:

all investors have free access to information that reflects absolutely all existing information related to this security;

all investors are good analysts;

all investors closely monitor market rates and instantly respond to their changes;

it is not difficult to assume that in such a market the price of a security will be a good estimate of its investment value; this property is the criterion for the efficiency of the financial market.

An efficient market (perfectly efficient market) is one in which the price of each security always matches its investment value.

In such an idealized market, each is always sold at fair value, all attempts to find securities with incorrect prices are futile, the information set is complete, new information is instantly reflected in market prices, all actions of market participants are rational and all are united in their goals.

It is customary to distinguish three degrees of market efficiency, in accordance with the degree of information efficiency of the market.

It is said that the market is efficient in relation to any information if this information is immediately and completely reflected in the price, i.e. it is impossible to build an investment strategy that uses only this information, which would allow to receive excess profits (other than normal) on a permanent basis. Depending on the amount of information that is immediately and completely reflected in the price, it is customary to distinguish three forms of market efficiency.

All information is divided into three groups:

past information - past state of the market ( dynamics rates, trading volumes, offer);

all information - includes both public and inside information that is known only to a narrow circle of people (for example, due to official position).

There are three forms of market efficiency:

weak form of efficiency (weak-form efficiency) - past information is fully reflected in the price of securities;

the average form of efficiency (semistrong efficiency) - public information is fully reflected in the value of securities;

strong form of efficiency (strong efficiency) - all information is reflected in the price of securities.

This definition of the degree of market efficiency is not fully formalized and is partly intuitive - in particular, neither the value of normal profit nor the targets of market participants (for example, their attitude to risk) are indicated. However, if we accept a certain pricing model (for example, the now classical CAPM profit), these definitions are easily formalized, which allows us to test the market efficiency hypothesis together with the chosen pricing model. All these concepts - market efficiency, excess profit, normal profit, risk - we will illustrate when we consider the CAPM model.

Which of the forms of efficiency is more suitable for modern developed financial profit?

To answer this question, let's look at the modern financial market. Three types of Analystov work on it:

fundamentalists ("fundamentalists") - conduct - proceed in their decisions from the "global" state of the economy, the state of certain sectors, the prospects of specific companies, and in their assessments they proceed from the rationality of the actions of market participants;

technicians ("technicians") - conduct technical analysis - are guided in their decisions by the "local" behavior of the market, for them the "behavior of the crowd" is especially important as a factor that significantly influences their decision, taking into account, among other things, psychological aspects; most of the methods they use are heuristic in nature (i.e., poorly formalized, not quite justified from a mathematical point of view);

quants ("quantitative analysts") are followers of L. Bachelier - conduct empirical research - identify patterns based on historical data, build models, form appropriate strategies.

Technical analysis is based primarily on the analysis of past market conditions, therefore, with a weak form of market efficiency, it makes no sense to spend time and money on it (information about past market conditions is already included in the price). Fundamental analysis, as well as empirical studies, is based on public information, therefore, with the average form of market efficiency, it is useless to resort to fundamental analysis. However, as it is easy to see, all the analysts described above exist well and are in great demand in modern world. Therefore, strictly speaking, the modern financial market cannot meet all the requirements of any degree of financial market efficiency.

On the other hand, in the modern financial market, a significant discrepancy between the price of a security and its investment value is a rare phenomenon. The fact is that a significant or undervaluation of a security in the market will be noticed by attentive Analysts who will try to profit from this. As a result, securities priced below investment value will be bought, causing the price to rise due to increased demand for them. And securities whose price is higher than investment value will be sold, causing the price to fall due to an increase in supply. It would seem that there is still an opportunity to profit from a small or temporary discrepancy, but in this direction there will be an obstacle in the form of transaction costs (for example, due to spread, liquidity), which are explicitly or implicitly included in the costs of any operations on stock exchange. As a result, the financial market is a kind of dynamic system that is constantly striving for efficiency.

Due to this self-organization of financial markets, modern developed stock markets can be classified as weakly efficient, although some anomalies are still present in it.

We emphasize once again that the concept of an efficient market continues to play a dominant role in modern Theory of Finance. However, this concept is being revised. First of all, this refers to the assumption that all investors are homogeneous 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), which react only to information related to their investment horizon (the so-called "fractality" of participants' interests) . The presence on the market of these two categories of investors is necessary for the stability of the market. Based on this range of ideas, the concept of fractality (fractionation) 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 phenomena 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 the nearest transactions are separated by an abyss. As, for example, it was during the default in Russian Federation in 1998.

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

The modern stock market, strictly speaking, is not efficient, so new information is gradually reflected in the price of the asset. As a result, a price is formed. It can be used to make a profit, provided that the price movement of the asset is detected in a timely manner. Similar methods are used by some mechanical securities trading systems. For the sake of completeness, let's assume that there is another kind of mechanical trading strategy that operates on the opposite principle - the purchase of an asset does not start when it starts 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 some stock index, i.e. contained a set of shares included in the selected . One of the first funds was "The Vanguard index Trust-500 Portfolio" (1976), created on the basis of index Standard & Poor's-500 (USA), which presents the shares of 500 companies (400 industrial, 20 transport, 40 consumer and 40 financial). This approach implements the idea of passively managing a well-diversified portfolio of securities. This approach does not require the presence of highly qualified Analysts, in addition, transaction costs are minimized, which inevitably arise in the case of active portfolio management.Despite the fact that passive methods of portfolio management are not the limit of the skill of portfolio managers, nevertheless, index funds show good results.If we turn to the statistics of the profitability of Russian mutual funds not many funds outperformed index funds in 2006. Moreover, if we look at the results for 2005 and 2006, only a few outperformed index funds over 2 years, and no one showed significantly better results. This is due to the fact that many funds use risky strategies, which allows them to get the best result when they are lucky. But not a single mutual fund has yet been able to consistently show results significantly better than the yield of index funds, precisely because of the relative efficiency of the stock exchange.

Ecapital market efficiency

The purpose of the capital market is an efficient redistribution Money between borrowers and borrowers. Individuals and companies may have excess capacity to invest 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 required money. Lenders who have excess funds after having exhausted all their productive possibilities at a rate of return greater than the borrowing rate are willing to lend because the lending rate is higher than they could otherwise earn. Thus, both creditors and creditors wealthy if efficient capital markets facilitate redistribution of funds. The lending/borrowing rate is used as an important piece of information by every producer 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 raising external funds (i.e., the lending rate). Thus, a market is said to be allocationally efficient if prices are determined from the equality of the minimum efficient rate of return for all producers and accumulators. In a distributed efficient market, scarce savings are optimally allocated to productive ones with income for everyone.

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

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

The presence of a perfect competition in the commodity 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. free and received simultaneously by all participants;

All participants rationally maximize expected utility.

Commodity markets and securities markets that meet these conditions will be both distributed and operationally efficient. Operational efficiency deals with the cost of reallocating money. If it is equal to zero, there is operational efficiency.

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

To show difference between perfect and efficient markets, let us loosen some assumptions in the definition of a perfect market. For example, the market will remain efficient if it ceases to be frictionless. Prices will be just as perfectly responsive to all sorts of information if sellers are forced to pay a brokerage commission exactly, or not be infinitely divisible. Moreover, the commodity market will remain efficient in the absence of a perfect competition. Hence, if it can earn monopoly profits in the commodity market, the efficient capital market will determine an asset price that fully reflects the present value of the expected stream of monopoly profits. So profits can have an inefficient distribution in commodity markets, but an efficient capital market. Finally, information can be paid for in an efficient market.

Capital market efficiency implies operational and distributed efficiency. Asset prices are accurate indicators in the sense that they are fully and instantly responsive to all sorts 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 that facilitate the passage of the above flows do so for a minimum amount.

Rubinstein (1975) and Latham (1985) expanded the definition of market efficiency. By their definition, a market is said to be efficient with respect to an information event if the information does not cause the portfolio to change. It is possible that people may disagree with the conclusions of a piece of information so that some will sell and others will buy at the same time, leading to price indifference. If the information does not change prices, then the market is called efficient in relation to information according to Fama, but not according to Rubinstein-Latman. The latter requires not only the invariance of prices, but also the absence of money movement.

Sources

marketanalysis.ru Mathematical tools of the stock market

aton-line.ru Aton

mirslovarei.com/ The world of dictionaries - a collection of dictionaries and encyclopedias

en.wikipedia.org Wikipedia - the free encyclopedia

Encyclopedia of the investor. 2013 .

Principles of the securities market and its functions

The economy of the country and the world is a combination of different markets. Among them, the most significant can be identified. These are the markets for labor, products, services and finance. The latter includes several subsystems, one of which is the stock market or the securities market. It represents economic relations in terms of the issue, redistribution and disposal of securities.

All economic interactions in the market are carried out with the help of an object - a security.

Remark 1

A security is a document of a strict form, of a standard form. It has a dual nature. Acting as the object of transactions, the stock instrument itself has no value, however, expressed by it property right, creates its price.

Now the market uses securities that do not have a physical expression. Usually the right of the owner assigned to them is registered in registries or depositories. All calculations are carried out without the use of documents, according to data provided by an organization that has passed state licensing.

The stock market, representing one of the elements of the structure economic system, performs a number of functions that affect it. These include:

accumulation of money supply and capital;
distribution of money between sectors of the economy or territories of the country;
maintaining the country's budget by issuing bonds;
stimulation of the population and production to investment activities;
attracting foreign investment and creating an open market.

In addition, the stock market is an indicator of socio - economic trends in society. Securities, as a tool, allow you to rebuild production, the structure of economic relations between individual entities.

In the scientific approach, it is customary to divide the stock market into subsystems. In the primary market, documents that have just been issued by issuers or are sold at a nominal price are turned around. The secondary market trades stock instruments at real market value. Here, all operations are carried out on the stock exchange. Persons who have not passed the entry threshold for the exchange operate in the tertiary market. With the development and introduction of Internet technologies, electronic trading platforms have appeared, where private individuals who have not passed state licensing can participate.

Features of the Russian stock market

The formation of the securities market in Russia began after the collapse of the Soviet Union. It is a young and dynamically developing segment of the national economy. Unlike Western countries, where the first shares appeared in the sixteenth century, in Russia the stock market has only just begun to gain momentum.

The economic system of any country has its own specific properties, formed under the influence of certain historical and evolutionary stages of its development. In Russia, the transition to the market was abrupt, one might say spontaneous. It required a rapid transformation of old institutions and the formation of new economic relationships.

In Russia, the stock market was formed during a period of economic recession accompanying the transition period. The factors influencing the formation of the securities market at that time were:

a sharp transition from a planned economy to a market economy;
lack of a legal framework for this segment;
the predominance of long-term low liquid types of securities;
high degree of risk in an unstable economic situation;
low level of operations;
lack of control and regulation system.

The market mainly used bills, certificates of deposit and bonds. The secondary market for stock circulation was not developed, and practically did not operate.

Problems of development of the securities market and ways to solve them

The defining role of the stock market in any country is to ensure economic relations in all sectors of the economy. The development of the market creates conditions for attracting investments, infusion of funds and capital from abroad, which in turn contributes to the growth of economic development rates.

International studies have shown that the Russian stock market is not attractive to foreign capital. The assessment of attractiveness was carried out according to the following parameters: the degree of openness of the market; conditions for the import and export of funds; information accessibility; stability of the market structure; development and performance of the market structure.

In the Russian stock market, there are also such problems as:

lack of funding through operations in the securities market;
a small share of real capital in the financial market;
lack of a workable system of organizations that ensure the effective functioning of the market;
imperfection of the legislative system capable of protecting the interests of all participants in transactions;
non-compliance with rules and regulations accounting world standards.

The state faces tasks that need to be solved in order to increase the attractiveness of the Russian economy for investors.

Developed countries are characterized by the presence of a single central depository. This approach makes it possible to unify actions for accounting, storage and provision of information on securities. In Russia, many depositories have their own rules, while the investor must choose one. A large number of these organizations reduces the availability and transparency of information on the movement of assets, which complicates the entry of foreign investors into the market. In Russia, the largest depositories are owned by two monopolists, which complicates and lengthens the process of moving assets and reduces their liquidity.

The development of innovations in the tax legislation of Russia will allow attracting new investors. The introduction of preferential rates on income from financial transactions will make it possible to determine the threshold value up to which the benefit will be valid. In addition, it is necessary to correct the legislation regarding the taxation of quick transactions, transactions involving individuals, including transactions that are unprofitable for individuals. The solution of these issues will increase the stability of the country's financial market as a whole.

The Russian stock market is characterized by a large number of speculative transactions. Regulation of this area of activity will create an information field that can not only provide the necessary data to new players, but also allows you to track unfair transactions.

Remark 2

Refinement legislative framework, which controls the securities market, will make it possible to remove conflicting legal acts, which in turn will have a positive effect on the efficiency of the market.

the ratio of the price of assets to information that is a reflection of all available data on assets, covers their returns and reflects the expected risk, analyzed and independently assessed by competing investors

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

Expand content

Collapse content

Market efficiency is, the definition

EfficiencyRmarket 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 change is random, they instantly and completely reflect both positively and negatively affecting information.

Market efficiency is a market in which equal free access to information regarding existing investment opportunities is provided, i.e. anyone who participates in trading activities has the ability to use the information to evaluate the behavior of the security in question in the past and, accordingly, is able to identify the reasons that led to the current market price of a security, having responsibly predicted its dynamics in the future 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 the reflection of all information that affects the pricing of assets in their prices.

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

For investors about market efficiency

The 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 and other factors that prevent transactions.

Transactions entered into by an individual or legal entity, cannot affect the general price level.

All market participants act rationally, seeking to maximize the expected benefits.

Obviously, 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 no one has canceled taxes. In view of the non-fulfillment of these conditions, it is necessary to distinguish between the ideal information efficiency of the market and their economic information efficiency.

In a perfectly 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 windfall profits are possible only through sheer 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.

Asset valuation theory postulates

In the previous material, asset valuation theory (CAPM) was presented on the basis of 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 that the Sharpe ratio is equal to the difference between the expected portfolio returns and the risk-free rate, divided by the expected standard deviation of the portfolio return.) Thus, investors do not seek to maximize wealth, but their own utility function (i.e., make decisions based on risk). The desire to maximize wealth would lead to a preference for assets with the highest expected return (and the highest risk).

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

Investor expectations are homogeneous (homogeneous). Those. investors equally evaluate the probability distribution of future asset returns. Violation of this postulate leads to the emergence of many effective boundaries and disruption of the market equilibrium. However, it can be shown that, as long as the divergence in investor expectations does not become prohibitive, the effect of lifting this constraint on CAPM results is small.

All investors have the same investment horizon. This postulate is necessary for the existence of a unique risk-free return. If investors invest for different periods of time, then they have different risk-free returns. In this case, the line of the stock market would "spread", especially when moving away from point M.

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

Investors can lend and borrow at the same risk-free rate. The difference in rates leads to the fact that the line of the capital market becomes broken. The theory can be easily extended to the case of different rates.

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

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

It can be seen from the comments that many of the restrictions imposed by postulates can be significantly weakened or even removed. At the same time, almost all the conclusions of CAPM are preserved, and only the system of proofs becomes much more complicated. Yes, and practice convinces of the stability of the CAPM conclusions - this theory has been widely used because it works quite well.

It should be noted here that CAPM is largely based on the assumption of market efficiency - the first five postulates are just necessary 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?

What 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: the capital market is efficient if asset prices respond quickly to new information. Sometimes such a definition is called narrow, implying that only the information efficiency of the market is meant.

Why does the market need to be efficient? Three reasons are usually given for the explanation:

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

New information enters the market randomly.

Competing investors are trying to quickly bring asset prices in line with incoming information.

A few words about the theory of efficiency

This adjustment of the asset's price to new information in an efficient market is not biased, although it may be imperfect. This sentence sounds convoluted, but 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, but at the same time, on average (both in time and in assets), the estimate 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 in line with incoming information requires the presence of a certain minimum number of investors in the market, constantly analyzing information and making transactions in accordance with the results of the analysis. The greater the number of such investors present in the market, the more effective it is. And a large number of aggressive investors trying to immediately bring the price of an asset into line with new information means a large volume of trading. So the efficiency of the market grows with the growth of volumes. In addition, the market can be efficient in relation to some assets (liquid), and at the same time - inefficient in relation to others (low liquidity).

Since new information is quickly reflected in the price in an efficient market, 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 price of an asset 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 build either a trading system or an investment strategy that could provide a return greater than that which is expected by the market in accordance with the investment risk.

Market Efficiency Hypothesis (EMH)

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

All available information reflected in this scheme can be conditionally divided into three groups. The first group consists of information about the past dynamics of rates, 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 - public information. In addition to public 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

The market is considered to be poor degree of effectiveness, if the prices of instruments circulating on it reflect only the information contained in the dynamics of past quotations. In such a market, it is impossible to make excess profits using only data on changes in securities prices in previous periods. It can be concluded that almost any organized stock market, which has a system for informing about price changes, has a weak degree of efficiency. This conclusion is confirmed by the results scientific research: arbitrarily deep statistical analysis of historical data on price changes does not allow accurately predicting their future behavior.

Checking for a weak form of GER

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

Statistical checks. If the market is efficient, then there should be no correlation between asset returns in 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 - there were no statistically significant deviations from zero for the autocorrelation coefficients.

(the asset rises on the first day, falls on the second, then rises 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 a 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 trading strategies can be invented almost infinitely, 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 the commission - many "winning" strategies require a large number of transactions, and as a result, the costs eat up all the additional winnings. But still, the results are not entirely unambiguous - several recent studies have shown the possibility of obtaining a win for some strategies. In general, research confirms the widespread belief that in a liquid market, known strategies do not give a win, but one can hope to “beat” the market by inventing a new strategy. This can provide super-returns until a significant number of investors follow it.

Conclusions. Developed markets are weakly efficient, but there is some data showing the potential for inefficiency with respect to some trading strategies developed from technical analysis.

Average degree of market efficiency

If the current market prices reflect the entire public, i.e. public information, the market has medium efficiency. In this case, it becomes impossible to get excess profit from the possession of such information. It is generally accepted that the most well-known organized stock markets in the world are medium-efficient. Studies show that in such markets, any new publicly available information is reflected in the price on the day of its publication, i.e. it immediately becomes known to all market participants, so the possibility of monopoly ownership and beneficial use of such information by individual players is practically excluded.

Checking the average form of GER

Publication of financial statements. Studies have shown that you can extract excess returns on investments (positive) by buying stocks after the release of quarterly reports in which the company's earnings are higher than the average expected by analysts. Moreover, if such a discrepancy exceeds 20%, then the excess profit on average exceeds the cost of commission. According to available statistics, 31% of excess growth occurs in the period before the announcement, 18% on the day of the announcement, and 51% after the announcement day (the effect usually wears out within 90 days). If the data is worse than expected (negative surprise), then the market reacts much faster, and it remains unclear whether you can get excess returns by shorting such stocks.

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 first trading day), these same shares are bought back. That is, the market at the end of the year goes down abnormally, and at the beginning of the year it grows abnormally (January effect). Studies have shown that such an effect does exist, and it is greater, the smaller the size of the company. Moreover, it is so large that it significantly covers transaction costs. (In an efficient market, there would be enough investors buying shares at the end of the year with credit money and selling at the beginning to eliminate the anomaly.) Another explanation for the January effect is window dressing by investment fund managers, as they are wary of showing assets on their balance sheets that suffered a significant loss.

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 abruptly. Can this be used to generate super profits? As it turned out, the answer depends on the type of events.

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

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

Passage of the listing. From the moment of publication of the company's decision to enter the stock exchange and until the announcement of the listing, the average profitability is slightly above the market, after that it is below the market.

The existence of indicators that could be used to predict future market returns. In an efficient market, the best estimate of future returns is long-term historical returns, and it is impossible to isolate these indicators.

It turned out that such indicators do exist in the real market. You can use the market average dividend yield (the ratio of dividend to share price) - the higher it is, the higher the future yield of the market as a whole. In addition, it was found that the spread between the average yield of Aaa and Vaa bonds (according to Moody's), as well as the time spread between long-term and 1-month bonds, can be used to predict the yield of stocks and 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 falls on the investment horizon from two to four years. In addition, the success of forecasts strongly depends on the state of the market - if the market is calm, the degree of reliability of forecasts is low. If the market volatility is high, then the degree of reliability of forecasts increases.

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 line of the stock market (LFR). The purpose of the research was to find such indicators that would allow to detect undervalued or overvalued assets, taking into account the risk. It should be pointed out that such studies test the combined hypothesis (market efficiency + CAPM fairness), since the risk of an asset is estimated by CAPM.

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

P/E ratio. Stocks with low P/E (the ratio of share price to earnings per share) are systematically undervalued, while stocks with high P/E are overvalued. A possible explanation is the fact that high P/E are inherent in the so-called "growth stocks", and the market systematically overestimates the growth prospects - in fact, growth is slower than expected.

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

At the same time, the possibility of predicting the future profitability of the stock market using such indicators as dividend yield or spread in the bond market has been established. Calendar effects, the market's response to surprises in corporate quarterly reports, and the ability to use indicators such as P/E, market capitalization, and P/BV to generate excess returns on investments are clear evidence against GER. At the same time, the degree of market inefficiency is almost always small (taking into account transaction costs), and it is not clear whether it will persist in the future - according to some reports, over time the market becomes efficient with respect to an increasing number of tests.

Strong degree of market efficiency

means that current market prices reflect not only public information, 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 ascribes to the market some mystical ability to read even the thoughts of its participants and determine their intentions about the expression of the eyes. However, the results of the conducted 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 valuable. With it, you can make not just money, but very big money. Many people understand this. Including bodies of control over exchange activity.

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 completed transaction will very quickly become public 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 information available. It is extremely difficult to do this without coming into conflict with the law (including criminal law). However, there is hardly any a large number of market players who would be intimidated by such difficulties. Therefore, in the near future, the emergence of a financial market with a strong degree of efficiency is not expected anywhere in the world.

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

We should not be surprised at the presence of such paradoxes. Without questioning the professionalism and sanity of market participants, one should not forget that all of them are living people who tend to make not only individual mistakes, but also fall under such "collective ailments" as mass psychosis and panic. The phenomenon 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 by giving someone the opportunity to make good money. But neither one nor the other has the right to say that the market is inefficient. The investment strategy could be 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. it can be concluded that any existing market is efficient. An inefficient market is not a market, but the absence of a market.

Therefore, the assertion 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 of the average degree of market efficiency. In fact, it denies the expediency of predicting the future income of enterprises whose shares are quoted on the market. However, the valuation of financial assets based on this approach is even more widespread than technical analysis. Examining all publicly available information in order to determine future income streams, choosing the most appropriate interest rate level, and discounting cash flows is called fundamental analysis.

By doing 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, they will sell them. By doing so, they not only do not refute the hypothesis of the average degree of market efficiency, but, on the contrary, save it from complete oblivion.

Many efforts have been made to test the fairness of each of the forms of GER. Most of the research has been on stocks traded on the New York Stock Exchange (NYSE). Moreover, stocks 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 findings may be biased in favor of GER support.

We studied 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 between dealer prices for buying and selling an asset).

In cases where asset selection or market slices were examined, a risk adjustment (beta) was made to ensure that excess returns were not provided by a simple increase in risk. Here, the excess return was defined as the difference between the actual return on the investment and the return predicted based on the CAPM, taking into account the beta of a particular stock. For example, in the study period, the market fell by 10%, and the beta of the stock is 1.5. Then the CAPM-based predicted return 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 slice of assets. Therefore, the effectiveness test was carried out on time periods exceeding several economic cycles. There are many investment and trading strategies that offer big wins at any given point in the business cycle, especially on the upswing.

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

Checking for a strong form of GER

The possibility of using insider information to generate 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 sight. Insiders are investors who either have access to important non-public information or who have the ability to systematically outperform other investors by acting on public information. Researchers distinguish three groups of such investors.

Corporate insiders. These are persons who have access to confidential data on the state of a particular company. In the US, they are required to report their transactions in the shares of this company, and some aggregate data is published. This data confirms that corporate insiders systematically generate excess returns on investments, especially if only purchases are considered. (Because these insiders are often rewarded in the form of options, sales are on average much larger than purchases, so there may be occasional sales just to cash out the reward.)

Analysts. Analysts of investment companies and banks make recommendations for buying / selling shares not only on the basis of publicly available information. They usually meet with top management, which allows them to assess the "human factor", and also get acquainted with the plans of companies for the future in more or less detail. As it turned out, on average, the recommendations of analysts (both in terms of choosing stocks to include in the portfolio, and in terms of choosing the time to buy / sell) allow you to get excess returns. The effect is especially pronounced for recommendations “Sell”, which are relatively rare. This is the basis for ethical requirements for analysts not to trade in stocks for which the investment firm they work for makes any recommendation.

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, although not formally insiders, can still receive excess returns based on insider information, then this is most likely a group of professional managers.

Alas, taking into account the risk, only about two-thirds of managers showed excessive returns over the long period, taking into account commissions and other costs - only one-third. (We mainly analyzed data on US mutual funds - they have a long open history of profitability.) Among other things, managers have the opportunity to systematically outperform other groups of investors, acting on the basis of public information - they receive it first of all. However, this, as studies show, does not lead to the possibility of extracting excess profit.

Exclusive access to sensitive information provides a significant excess return on investment for corporate insiders, which belies the strong form of ERT. For the group of professional analysts, the data is mixed, the possibility of obtaining excess profits is shown, but not high. Finally, the data for a group of professional asset managers support the GER - there is no potential for excess returns. Since the average investor is unlikely to outperform the manager both in access to insider information and in the speed of responding to new information, the market must be efficient for him (by these parameters).

About efficiency models

Trade-off between risk and return

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

In a moderate form of market efficiency, where all publicly available information is reflected in prices and, therefore, securities 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 excessive returns are 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, suppose that the expected return on AT&T shares is 14%, but that the same firm's bonds yield only 9%. Does this mean that all investors should buy AT&T stock and not its bonds, or that the firm should be financed by debt rather than equity? Of course not - the higher expected return on stocks simply reflects their greater riskiness.

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

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

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

The moral of this story is simple. Transactions in efficient markets have zero NPV. However, physical goods markets are generally not efficient, at least in the short term, and the sale of tangible assets such as machine tools, toothpaste or shopping centers - can bring super profits. For example, in the early days of personal computers, IBM and Apple almost monopolized the market, and the combination of high profitability and high sales volume provided these companies with high profits. However, their high profitability attracted dozens of competitors to the market, which resulted in lower prices and a decrease in profitability for producers to a level close to the usual. 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, the most important capital markets are almost always efficient.

The EMH and the resulting concept of trade-off between risk and return are important for both investors and managers. For investors, the EMH points out 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

Minimization of transaction costs using the "buy and hold" strategy.

EMH tells managers that it is impossible to increase the value of the company through operations in the financial market. If the NPV of such operations is zero, then the value of the firm can only be increased through operations in the market of tangible goods and services. IBM became a world leader in computing because it succeeded in designing, manufacturing and marketing products, not because of some great financial decisions, and if it loses that position in the future, it will be because of bad decisions in manufacturing and sales. The prices of financial assets are generally quite objective, and decisions based on the fact that certain securities are quoted at undervalued or overvalued prices should be treated with great caution. When we talk about the efficiency of markets, we usually mean the stock market, but this principle also applies to capital markets, and therefore decisions based on assumptions about the upcoming rise or fall of interest rates have a fragile foundation.

Sometimes innovations in the securities markets result in above-normal returns because new securities that offer a risk-reward ratio not available in previously issued securities may be overpriced. Such was the case in the early 1980s, when Wall Street firms were separating government bond coupons in order to have zero-coupon government securities. However, the new securities could not be patented, so any rush demand that kept the new security overpriced quickly subsided, and the NPV of these securities soon dropped to zero.

The concept of the efficiency of financial markets

The concept of the efficiency of the financial market 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 related to asset valuation 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 action of the asset play no role in determining the future development of the price action.

It is customary to distinguish 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 (price statistics plus publicly available information);

Strong - 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 evaluate 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.

Evaluation of financial market efficiency

There are several methods for evaluating the effectiveness of the financial market, depending on the level of efficiency that a particular financial market is tested for.

The efficiency criterion is the very possibility of obtaining, through the use of one or another type of information, a positive return on operations. But that is not all. This return is generally 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 - indexation - 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 a set of financial assets and instruments. The reason for building a portfolio on the basis of 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, you need to use an index that most accurately reflects the dynamics of the entire market.

Then the test of market efficiency consists in finding the degree of excess of profitability in operations based on various information over the profitability of the market portfolio.

Testing any level of performance comes with a number of challenges. The fact 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 lie in the following:

In a different perception and giving different significance to the participants of the same information;

In different interpretations of the same information by the participants;

In the different abilities of the participants to research work.

In financial markets, we note that attempts to assess the average and strong levels of market efficiency are associated with the same problems - the presence of various 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 vary significantly from one participant to another.

Financial market analysis methods

Since market efficiency is primarily the speed and flexibility of prices 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 on four types of analysis that help analysts: technical, mathematical, graphical and fundamental.

Technical analysis

This is an approach to the analysis of financial markets based on identifying patterns in price movements.

Learn more about technical analysis

Technical analysis (also called chartism; chart - map, chart) states that time series charts of prices contain information about how investors react to new events. Understanding market psychology can help an analyst predict future trends. Under some assumptions, such well-known Chartist methods, as the rule of exceeding the limit of price change (TRB = trading-range break) and the moving average rule (MA = moving-average), can give a profitable trading strategy.

The TRB rule says to buy when the price exceeds its previous high and sell when the price falls below the latest low, while the MA rules are based on the idea that you should buy when short-term moving averages exceed (cross ) long-term moving averages, and sell when the short-term move below the long-term. Several variations of these rules were tested on Dow Jones stock index data from 1897 to 1988, using a random walk series and the GARCH model as benchmarks. Both trading rules generated significant profits: sell orders were followed by price drops by an average of 9%, and buy signals were followed by price increases by an average of 12% (on an annual 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 includes everything. This means that the price reflects all the information associated with the asset or financial instrument, and therefore only prices need to be studied;

There are some regularities in the dynamics of the price, thanks to which there is an opportunity to extract income;

The price can have three directions: up, down and sideways. In the case of movement up or down, they say that there is a trend (trend).

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

Mathematical analysis

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

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

Mathematical analysis allows you to build mathematical models, in which the price change is 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, exceed the classical ones (which are based on a generalized, mechanistic smoothing of the dynamic series), and to create, using such indicators, a highly effective original trading system.

Indicators built on the basis of the 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 loss order should be triggered, whether it is necessary to close a profit-making position due to the outcome of the price trend. These indicators are informative for investors operating both on a short and long time horizon, they bring information useful to market participants seeking both to receive exchange rate income and to insure their positions in other assets against risks, they 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 about the future behavior of the price are derived based on the analysis of simple graphical 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 by the computer independently on the basis of a given formula. "Graphic indicators" are applied by the trader to the chart independently. The number of various patterns identified by analysts over several hundred years is very large.

The ability of a trader 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 during the decision to open a position. But on indicators only graphical analysis of an effective strategy cannot be built.

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 charts and calculate the patterns of market behavior. Indicator signals help a trader to understand the price dynamics of exchange instruments.

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

Fundamental analysis

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

About the fundamentals of fundamental analysis

The list of information studied can be very long, so we will give only a few examples. When evaluating the prospects for 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 paid dividends, position of the issuer in the market, market share, development strategy of the issuer and industry prospects, economic and political situation in the country of the issuer, 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.

A feature of fundamental analysis is that it is extremely difficult to formalize it. Of course, the techniques and methods of this analysis are quite objective, but the amount of information and the different interpretation of this information by market participants make fundamental analysis an art. Although it should be noted that there are models that allow, by substituting numerical financial indicators, to obtain an estimated assessment of the prospects for the issuer's activities.

The concept of market efficiency was tested by Western researchers in practice. They came to the conclusion that the market does not have a strong form of efficiency, but at the same time one can speak of its weak form. As for the middle form of efficiency, the debate continues on this issue. A number of studies have found market anomalies that contradict this hypothesis to a certain extent. So, the effect of the day of the week was discovered, which says: the profitability of a financial instrument on Monday is usually less 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 consists in the fact that the profitability of small firms is greater than large firms in comparison with their level of risk. Studies have also shown that, after the announcement of quarterly earnings, businesses could make excess profits by buying shares of companies with particularly good results or selling shares of companies with poor results, since the trend caused by such information continued for some time. At the same time, these anomalies should hardly be regarded as strong arguments in favor of refuting weak and even moderate forms of market efficiency.

The fact is that in the cases noted, the deviations in the profitability of financial assets were not so large that it was possible, taking into account transaction costs, to constantly receive a profit higher than the market average. In defense of the EMH, one can also say the following: the search 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 EMH.

As another criterion of 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 deals help restore balance.

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

EMH argues that an investor cannot make excess profits from operations with an asset. However, this provision should be clarified. EMH says that the investor will not be able to get excess profits on a permanent basis due to the fact that the market is efficient, but she does not deny the possibility of excess profits due to any circumstances. For example, an investor has purchased shares in a certain company. The next day there was a message about their buying by another company. As a rule, it is carried out at a higher price in order to encourage the owners to sell their paper. As a result, the next day, the shareholder can sell his shares and receive excess profit.

If we consider the presence of an investor in the market in the long term, then EMH suggests that at some point he can get a higher income, sometime he can suffer losses, but over a significant period of time this sum of pluses and minuses will give almost zero results.

Operational efficiency of the market

Above we talked about information efficiency. There is also the concept of market operating efficiency. It shows how quickly the 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 the established forms of interaction between clients and brokerage companies.

For example, a dealer in the GKO-OFZ market will have an advantage over a client if the terms of the contract do not provide 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 opportunity to quickly respond to changes in the current market situation. Thus, if the market is not efficient from an operational point of view, then there are always investors in it who have an advantageous position compared to other participants in the trade.

If the market is not operationally efficient, then it will not be informationally efficient either. As a result, there are opportunities for obtaining super 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 precisely equal access to information in the face of operational inefficiency that will provide investors with parts of excess profits.

Modern interpretation of market efficiency

The concept of the efficient market continues to play a dominant role in modern Theory of Finance. However, this concept is being revised. First of all, this refers to the assumption that all investors are homogeneous 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), which react only to information related to their investment horizon (the so-called "fractality" of participants' interests) . The presence on the market of these two categories of investors is necessary for the stability of the market.

Based on this range of ideas, the concept of fractality (fractionation) 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 phenomena 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 the nearest transactions are separated by an abyss. As, for example, it was during the default in Russia in 1998. We don't want this topic to be crumpled, so we'll cover 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, strictly speaking, is not 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 price movement of the asset 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 kind of mechanical trading strategies that operate on the opposite principle - the purchase of an asset begins not when it starts 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 represents the 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 the presence of highly qualified analysts, in addition, transaction costs are minimized, which inevitably arise in the case of active portfolio management. While passive portfolio management techniques are not the ultimate skill of portfolio managers, index funds still perform well.

If we turn to the statistics of Russian mutual fund returns for 2006, it turns out that not many funds performed better than index funds. Moreover, if we look at the results for 2005 and 2006, only a few outperformed index funds over 2 years, and no one showed significantly better results. This is due to the fact that many funds use risky strategies, which allows them to get the best result when they are lucky. But so far, no mutual fund has been able to consistently show results significantly better than the yield of index funds, precisely because of the relative efficiency of the stock market.

Ecapital market efficiency

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

Lenders who have excess funds after having exhausted all their productive possibilities at a rate of return greater than the borrowing rate are willing to lend because the lending rate is higher than they could otherwise earn. Thus, both lenders and borrowers are wealthy if efficient capital markets help redistribute cash. The lending/borrowing rate is used as an important piece of information by every producer 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 raising external funds (i.e., the lending rate).

Thus, the market is called allocated efficient (allocationally 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 investment for the benefit of everyone.

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

Frictionless markets, i.e. 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. information is free and is received simultaneously by all participants;

Operational efficiency

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 be just as perfectly responsive to all sorts of information if sellers are forced to pay a brokerage commission or the capital is not infinitely divisible. Moreover, the commodity market will remain efficient in the absence of perfect competition. Hence, if a firm can earn monopoly profits in the commodity 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 an inefficient distribution in commodity markets, but an efficient capital market. Finally, information can be paid for in an efficient market.

Research on the efficiency 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 problems of corporate governance were touched upon. This project was represented by four subprojects within two research areas.

Within the framework of the first direction, financial markets were studied, including the pricing of derivative financial instruments 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 information on liquidity in trading financial instruments were considered.

The second direction is related to the problems of corporate governance. The following issues were considered: the role of the political proximity of the participating countries in international transactions on acquisitions and mergers of companies, and the effectiveness and financial sustainability of state 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 liquidity provision and pricing 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) explores a financial instruments trading model 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 chosen strategy. Particular attention is paid to the influence of latent liquidity on the trading costs of uninformed traders and the informational efficiency of prices. The subproject “Pricing of options with regular jumps in the price of the underlying asset” (the third subproject) is related to the problems of option pricing. This direction 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 growth of global financial instability.

The purpose of the study of the effectiveness of financial markets

The subprojects have a number of objectives.

Examine the impact of dark liquidity on market quality using a trading model in financial instruments 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. Namely, to investigate the role of political proximity in setting the initial premium offered by a buyer in a cross-border transaction.

Determine the size and proportion of the company's specific risk (as opposed to systemic risk) in the price of an option on this company.

Financial market research results

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

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

As a result of the second subproject, strong and consistent evidence was found that the initial premium in cross-border transactions has a negative dependence on political proximity. Moreover, the size of the buying and buying company dampens 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 is reduced with a high level of political restrictions of the home country that the government faces in carrying out its foreign policy activities.

The result of the third sub-project was the proposal of a simple solution for the price of a European call option per share, which is subject to regular fluctuations. We illustrate the validity of our model by showing its predictive strength compared to the Black-Scholes model on a sample of 5 low dividend stocks. Returning to firm-induced uncertainty and its factors, we look at a sample of 30 firms from 1999-2010, where one-eighth of the volatility in stock returns is due to the expected spike on the day of the release. Examining the distribution of expected jump size for 1999-2010 in a sample of 30 companies, it was found that the uncertainty caused by the company itself is higher during technology shocks and decreases with decreasing company size and market value to book value ratio. The relative contribution of the jump component to the expected return variation is smaller for retail stocks. We also found a slight decrease in the jump during the crisis. In addition, derivatives' liquidity and high market-to-book ratios reduce the relative impact of company-related uncertainty on option pricing.

Application of financial market research

Within the framework of academic goals, projects have different perspectives for further research. In particular, under the first subproject, the developed model considers stealth/transparency as an attribute of the market architecture, which is directly suitable for cases of mandatory transparency (as, for example, in the case of the Australian Stock Exchange) and is important for regulators who consider this policy. Our work shows that a more appropriate policy would be to allow total liquidity hiding without deprioritization (as happens in mixed approach markets where orders can only be partially hidden, with liquidity disclosure preferable to hiding).

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 takeover 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 up-to-date information or useful connections. It shows that international relations matter for cross-border absorption, and that political relations between countries can determine the behavior of governments towards foreign companies. Proximity (remoteness) is the cause of positive (negative) discriminatory behavior, such as easy (or limited) access to political and business circles, and trade diplomacy efforts are likely to become more (less) effective in gaining an advantage for the buyer.

The third project offers a simple solution to the price of a European call option on a share that is subject to regular spikes. It illustrates the validity of our model by showing its predictive strength compared to the Black-Scholes model on a sample of 5 low dividend stocks. Returning to the uncertainty caused by the firm itself and its factors, the subproject considers a sample of 30 firms for 1999-2010, where one-eighth of the volatility in stock returns is due to the expected spike on the day of the release.

Examining the distribution of expected jump size for 1999-2010 in a sample of 30 companies, it was found that the uncertainty caused by the company itself is higher during technology shocks and decreases with decreasing company size and market value to book value ratio. The relative contribution of the jump component to the expected return variation is smaller for retail stocks. A slight decrease in the jump during the crisis period was also found. In addition, derivatives' liquidity and high market-to-book ratios reduce the relative impact of company-related uncertainty on option pricing.

Sources and links

Sources of texts, pictures and videos

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

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

marketanalysis.ru - information portal about mathematical tools 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 for financial management

coolreferat.com - collection of abstracts

vuzlib.org - economic and legal library

student.zoomru.ru - collection of student works

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

isd82.narod.ru - electronic library

ronl.ru - essays, diplomas, term papers

refoteka.ru - the largest collection of abstracts, reports, essays, term papers, theses 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 Ivan Kushnir Institute of Economics and Law

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

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

strategii.net - website dedicated to Forex market strategies

hse.ru - HSE website

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 through Yandex

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

Links to application programs

chrome.google.ru - web browser

hyperionics.com - site of the creators of the HyperSnap screen capture program

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

Analysis of what information can give recommendations regarding certain assets? This is due to the level of market development, or rather, what information it manages to translate into changing prices. The allocation of three forms of information efficiency of the capital market was proposed in 1967 by a researcher from the University of Chicago G. Roberts (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" by Eugene Fama. The scientists suggested that it is possible to classify markets according to their degree of efficiency, which is determined by the ability of the market to objectively and correctly form a price, and proposed the following classification.

1. If the prices of securities 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 a return above the market, using only information about the historical prices of assets. When the market knows only the past values of the Blue Chip stock, and the financial analyst can calculate its true value, there is an objective opportunity to profit from it. Under these conditions, fundamental analysis can be very useful, revealing the prospects for profit and changes in the yield of securities, and, therefore, indicating the presence of price anomalies.

2. Average degree of efficiency - semi-strong form (semistrong-form efficiency) implies that all publicly available information is fully reflected in the prices of securities. 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 the future price movement, and such recommendations can bring excessive profits to the investor.

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

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

Since the strong form in the efficient markets hypothesis is neither provable nor empirically testable, since testing it requires access to information from all insiders, recommendations focused on the first two forms of efficiency.

This is especially significant, since the domestic securities market cannot be so efficient initially, because it does not empirically confirm any of the conditions for the efficiency of the stock market:

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 freely and equally competes in the securities market.

Informational and technological asymmetries in the Russian securities market create price anomalies. As new information arrives arbitrarily, the reaction to it, and the expectations of market operators, the dynamics of stock asset prices, in turn, changes arbitrarily. The Efficient Markets Hypothesis suggests that short-term movements in stock prices are unpredictable. Empirical studies show that in the domestic securities market, the amount of return 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 this investment. This difference between the actual return received and the investment's own return is known as the anomalous return. An anomaly can be obtained only if the securities are incorrectly valued, i.e. their prices do not match their value. Abnormal returns occur when the relationship between risk and return is violated, which consists in the fact that investors at a higher risk require a higher return. If the market were balanced, then there would be no anomalies, and it would be impossible for the market to produce returns other than normal.

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 make a profit other than normal (profit of the market portfolio) in such a market. In an efficient market, prices reflect all important information, and thus investors cannot find anomalies using this information.
2. In an efficient market, risk is rewarded, and investors with more risk, on average, get more returns. The rate of return that investors receive in an efficient market corresponds to the amount of risk they take on. The 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 that 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 is quickly received by all market operators
5. In an inefficient market, the owners of sensitive information have a distinct 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 risk.
6. In an efficient market, investments are always correctly valued, the only thing a reasonable investor can do without resorting to fundamental and technical analysis is to use an index investment model. The product of the efficient markets hypothesis was a new investment technology: instead of choosing the shares of a particular company, the 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.

REMEMBER

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

Efficient securities market. Analysis of the effectiveness of securities

And the second neoclassical concept is the market efficiency hypothesis formulated by E. Fama. Efficiency criterion here

understanding the efficiency of the market allows us to substantiate from a new perspective the problem of the efficiency of the stock market on

An empirical study of the efficiency of the Russian stock market is based on the market efficiency hypothesis

Features of the Russian stock market

Problems of development of the securities market and ways to solve them

the ratio of the price of assets to information that is a reflection of all available data on assets, covers their returns and reflects the expected risk, analyzed and independently assessed by competing investors

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

Market efficiency is, the definition

The concept of market efficiency

Asset valuation theory postulates

What market can be considered efficient?

Market Efficiency Hypothesis (EMH)

Weak degree of market efficiency

Checking for a weak form of GER

Average degree of market efficiency

Checking the average form of GER

Strong degree of market efficiency

Checking for a strong form of GER

Trade-off between risk and return

The concept of the efficiency of financial markets

Evaluation of financial market efficiency

Financial market analysis methods

Technical analysis

Mathematical analysis

Graphical analysis

Fundamental analysis

Operational efficiency of the market

Modern interpretation of market efficiency

Ecapital market efficiency

Research on the efficiency of financial markets

Object of study - financial markets

The purpose of the study of the effectiveness of financial markets

Financial market research results

Application of financial market research

Sources and links

Sources of texts, pictures and videos

Links to application programs

Leukocytes in the blood, their norm

What value of leukocytes is considered the norm

Milk with honey and butter - the best folk remedy for cough

Nutrition for constipation in adults

Categories