Market Efficiency
Fundamental analysis
It assumes markets are semi-strong-form inefficient. Fundamental analysts use publicly available information to estimate a security's intrinsic value to determine if the security is mispriced, which is inconsistent with the semi-strong form of market efficiency. If markets are not semi-strong-form efficient, then fundamental analysts are able to use publicly available information to estimate a security's intrinsic value and identify misvalued securities.
Strong form efficient
It has past market data and all public and private information.
Weak-form efficient
It's based on past market data. Weak-form market efficiency states that investors cannot earn abnormal returns by trading on the basis of past trends in price and volume.
Efficient market hypotheses and Behavioral finance
The efficient market hypothesis and asset-pricing models only require that the market is rational. Behavioral finance is used to explain some of the market anomalies as irrational decisions.
Information cascade
The transmission of information from those participants who act first and whose decisions influence the decisions of others.
Efficient market
An informationally efficient market (an efficient market) is a market in which asset prices reflect new information quickly and rationally. An efficient market is thus a market in which asset prices reflect all past and present information.
January effect
Calendar anomaly that stock market returns in January are significantly higher compared to the rest of the months of the year, with most of the abnormal returns reported during the first five trading days in January. Also called turn-of-the-year effect. The excess returns in January are not attributed to any new information or news; however, research has found that part of the seasonal pattern can be explained by tax-loss selling and portfolio window dressing.
Market anomaly
Change in the price or return of a security that cannot directly be linked to current relevant information known in the market or to the release of new information into the market.
Herding
Herding occurs when investors trade on the same side of the market in the same securities, or when investors ignore their own private information and/or analysis and act as other investors do.
Technical analysis
It assumes markets are weak-form inefficient. Technical analysts use past prices and volume to predict future prices, which is inconsistent with the weakest form of market efficiency.
Semi-strong form efficient
It has past market data and all available public information. If markets are semi-strong-form efficient, then passive portfolio management strategies outperform active trading strategies. Semi-strong-form market efficiency states that investors cannot earn abnormal returns by trading based on publicly available information.
Earnings surprise
The portion of a company's earnings that is unanticipated by investors and, according to the efficient market hypothesis, merits a price adjustment.
Data mining
The practice of determining a model by extensive searching through a dataset for statistically significant patterns. Also called data snooping.
Size and value effect
The size effect results from the observation that equities of small-cap companies tend to outperform equities of large-cap companies on a risk-adjusted basis. A number of global empirical studies have shown that value stocks, which are generally referred to as stocks that have below-average price-to-earnings (P/E) and market-to-book (M/B) ratios, and above-average dividend yields, have consistently outperformed growth stocks over long periods of time.
Loss aversion
The tendency of people to dislike losses more than they like comparable gains. Behavioral theories of loss aversion allow for the possibility that the dislike for risk is not symmetrical, which allows for loss aversion to explain observed overreaction in markets such that investors dislike losses more than they like comparable gains.