Brokers Awareness program 5 - PowerPoint PPT Presentation

Loading...

PPT – Brokers Awareness program 5 PowerPoint presentation | free to view - id: d2f2c-ZDViN



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

Brokers Awareness program 5

Description:

Margin is the amount you put up to trade without paying the full ... Or, add to all of the above margin calculations for futures contracts and options premiums. ... – PowerPoint PPT presentation

Number of Views:50
Avg rating:3.0/5.0
Slides: 151
Provided by: christo435
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: Brokers Awareness program 5


1
Brokers Awareness program(5)
  • Dr. Mounther Barakat
  • Securities and Commodities Authority

2
?????? ????? ??????? ?????? ??????
  • ?. ???? ????? ??????
  • ???? ??????? ??????? ??????

3
Margin Trading??????? ???????
  • Margin is the amount you put up to trade without
    paying the full balance.
  • Initial margin (IM) is the value of your equity
    in the margin trade.
  • Maintenance margin (MM) is the minimum equity you
    need to maintain at all time.
  • Margin call (MC) is the amount that you need to
    put up to bring your equity back to the initial
    margin.

4
Margin Trading??????? ???????
  • XYZ is now selling at DHS10. You have DHS5000 and
    would like to purchase 1000 shares. Your broker
    is willing to extend you a loan at the call money
    rate2 for processing and other costs.
    Maintenance margin is 37.5.
  • Calculate your profits and losses in the case of
    10 price move in both directions.
  • Calculate the minimum price before getting a
    margin call.

5
Margin Trading??????? ???????
Price _at_ DHS10
6
Margin Trading??????? ???????
Price up by 10 _at_ DHS11
7
Margin Trading??????? ???????
  • Return with and without use of margins.
  • Without margin
  • R(11000-10000)/1000010.
  • With margin
  • R(6000-5000)/500020.
  • Your margin is
  • 6000/1100054.54

8
Margin Trading??????? ???????
Price down by 10 _at_ DHS9
9
Margin Trading??????? ???????
  • Return with and without use of margins.
  • Without margin
  • R (9000-10000)/10000 -10.
  • With margin
  • R (4000- 5000)/ 5000 -20.
  • Your margin is
  • 4000/900044.44

10
Margin Trading??????? ???????
  • The minimum price before hitting the first margin
    call is
  • P(IMP0)/(1-MM)
  • In our example
  • P(.510)/(1-.375)8

11
Margin Trading??????? ???????
Price _at_ DHS11 which the margin call price.
12
Margin Trading??????? ???????
  • Return with and without use of margins.
  • Without margin
  • R (8000-10000)/10000 -20.
  • With margin
  • R (3000- 5000)/ 5000 -40.
  • Your margin is
  • 3000/800037.5

13
Margin Trading??????? ???????
  • Need to add cash to the account to go back to 50
    or as agreed with the broker.
  • Margin call calculations
  • cash PNIM-Eq
  • Cash 810000.5-3000
  • 1000

14
Margin Trading??????? ???????
Your margin now is MEq/Inv. 4000/8000 50
back to IM.
15
Margin Trading??????? ???????
  • See XLS file for further training

16
Short Selling and Margins?????? ?????? ???
???????
  • Margin is the amount of cash you put up as a
    security against the increase in your liability
    due to short selling.
  • Initial margin (IM) is the value of your cash
    balance against the short sold position
    (liability).
  • Maintenance margin (MM) is the minimum equity you
    need to maintain at all time.
  • Margin call (MC) is the amount that you need to
    put up to bring your equity back to the initial
    margin.

17
Short Selling and Margins?????? ?????? ???
???????
  • XYZ is now selling at DHS10. You would like to
    short 1000 shares. Your broker requires a 50
    cash margin paid up front. Maintenance margin is
    37.5.
  • Calculate your profits and losses in the case of
    5 price move in both directions.
  • Calculate the minimum price before getting a
    margin call.

18
Short Selling and Margins?????? ?????? ???
???????
Price _at_ DHS10
19
Short Selling and Margins?????? ?????? ???
???????
Price up by 5 _at_ DHS10.50
20
Short Selling and Margins?????? ?????? ???
???????
  • Return with and without use of short selling.
  • Without short selling
  • R(10500-10000)/100005.
  • With short selling
  • R(4500-5000)/5000-10.
  • Your margin is
  • 4500/1050042.86

21
Short Selling and Margins?????? ?????? ???
???????
Price down by 5 _at_ DHS9.5
22
Short Selling and Margins?????? ?????? ???
???????
  • Return with and without use of short selling.
  • Without short selling
  • R(9500-10000)/10000-5.
  • With short selling
  • R(5500-5000)/500010.
  • Your margin is
  • 5500/950057.89

23
Short Selling and Margins?????? ?????? ???
???????
  • The minimum price before hitting the first margin
    call is
  • PP0(1IM)/(1MM)
  • In our example
  • P10(1.5)/(1.375)10.909

24
Short Selling and Margins?????? ?????? ???
???????
Price _at_ DHS10.909
25
Short Selling and Margins?????? ?????? ???
???????
  • Return with and without use of short selling.
  • Without short selling
  • R(10909-10000)/100009.09.
  • With short selling
  • R(4091-5000)/5000-18.18.
  • Your margin is
  • 5500/950037.5

26
Short Selling and Margins?????? ?????? ???
???????
Price _at_ DHS12
27
Short Selling and Margins?????? ?????? ???
???????
  • The position now is 12000 and the equity is 3000.
  • The drop in equity is equal to the difference
    between the initial position and the current
    position value.
  • That makes our margin below the 37.5 maintenance
    margin.
  • Cash is needed to go back to the initial margin.

28
Short Selling and Margins?????? ?????? ???
???????
  • Need to add cash to the account to go back to 50
    or as agreed with the broker.
  • The drop in equity is equal to
  • Current position initial position
  • 12000-10000 2000
  • The value of current equity is equal to
  • the initial equity the drop
  • 5000-2000 3000
  • The margin now is equal to
  • Current equity/current position
  • 3000/12000 25
  • This less than the 37.5 maintenance margin. To
    go back to the initial margin, we need to add
    cash to answer the margin call.

29
Short Selling and Margins?????? ?????? ???
???????
  • To go back to the initial margin of 50 we need
    to make equity equal to half the current
    liability position
  • IMP1N 0.5121000 6000
  • Margin call calculations
  • Margin call amount
  • Current Equity requirement-Current equity
  • 6000-3000 3000

30
Short Selling and Margins?????? ?????? ???
???????
  • See XLS file for further training

31
Advanced Margin Calculations?????? ???? ????
??????
  • Margin Accounts can become very complex
    especially if there are multiple diverse
    transactions.
  • An example would be to calculate the margin
    requirements for buying a stock on margin and
    short selling another.
  • Or, you may want to add to that some other
    securities purchased without the use of margin.
  • Or, add to all of the above margin calculations
    for futures contracts and options premiums.
  • Will revisit later on.

32
Segregation of Clients Accounts??? ????????
  • Client Money is separated from brokers money.
  • Brokers can no longer use one client money (free
    of charge) to lend to other clients for stock
    purchases.
  • Benefits
  • Lower risk.
  • Enhance the availability of cash for clients
    withdrawals.

33
Segregation of Clients Accounts??? ????????
  • Where does the cash go? To banks.
  • Why then move the cash from brokers to banks? Two
    reasons
  • Banks enjoy higher liquidity and greater
    readiness to answer cash demand.
  • Bank capital is structured to have a component
    that accounts for these deposits, brokers do not.

34
Segregation of Clients Accounts??? ????????
  • What are the problems with brokers practice of
    using clients cash to finance other clients stock
    purchases?
  • Risk of illiquidity
  • Strains on leveraged brokers accounts
  • No brokers capital rules to protect loans made to
    clients using other clients money
  • Brokers are not allowed to make such loans by
    legal definition of brokering
  • There are no regulations for margin trading in
    place.

35
Segregation of Clients Accounts??? ????????
  • What are the problems of account segregation? -
    Lower liquidity for trading.
  • Well this liquidity is not allowed in the first
    place and markets should have never used this
    extra liquidity.

36
Segregation of Clients Accounts??? ????????
  • If brokers are so concerned about this lack of
    liquidity and they think it is not healthy to
    stay without it then why not bear the cost of
    borrowing from banks to create this claimed extra
    liquidity?
  • In no way does the SCA condone or encourage
    brokers to do so, not until the regulations that
    deal with that are ready.
  • These regulations are being worked on and will be
    ready very soon.

37
Segregation of Clients Accounts??? ????????
  • So, to avoid this lack of liquidity, why didnt
    SCA delay account segregation until after it had
    such regulations in place?
  • Well, SCA never allowed lending by brokers and
    such lending should not be happening.

38
Segregation of Clients Accounts??? ????????
  • What is the difference between the current
    informal lending and the lending under SCA
    regulations?

39
Segregation of Clients Accounts??? ????????
  • Under the regulations things will be
  • Organized
  • Safe
  • Fair
  • And controllable

40
Market Making???? ?????
  • Evidence shows that two of the main problems that
    emerging markets face are
  • Capital supply shortage and
  • low liquidity
  • Market making is thought to be a good tool to
    remedy these problems.

41
Market Making???? ?????
  • The tools other than market making that are used
    to by emerging markets to remedy the above
    problems are
  • market segmentation (trading hours, main and
    parallel markets),
  • different trading phases (continuous and auction
    trading),
  • introduction of special incentives for submission
    of limit orders (hidden reserve orders, standing
    orders, etc).

42
Market Making???? ?????
  • The implementation of the market making system
    contributes the following
  • promotes liquidity,
  • lowers transaction costs,
  • reduces volatility and
  • improves daily turnover of the listed securities

43
Market Making???? ?????
  • Four types of market making systems which are
    applied in modern stock markets
  • The quote-driven market making system,
  • The centralized market making system in an
    order-driven market electronic
  • The centralized market making system in an
    order-driven market Floor
  • The noncentralized market making system in an
    order-driven market.

44
Market Making???? ?????
45
Market Making???? ?????
  • Market making (dealer) system in a quote-driven,
    electronic market
  • public investors generally cannot trade directly
    among themselves.
  • In order for buyers (sellers) to execute an order
    they have to contact a market maker (dealer) who
    uses his/her own inventory in the transaction.
  • There is more than one market maker per company
    who announces on a continuous basis quotes to buy
    and sell a number of shares at a particular
    price.
  • Dealers compete among themselves for more
    competitive bid and/or ask prices that will
    attract the order flow from public
  • Certain exchanges prohibit the use of market
    makers for their high liquidity stocks. In LSE,
    the 100 stocks that belong to the SETS system are
    traded electronically.
  • Stock markets that apply this system are the
    NASDAQ and the London Stock Exchange (LSE).

46
Market Making???? ?????
  • Centralized market making system in an
    order-driven, floor-based market
  • All potential buyers or sellers can directly
    trade among themselves
  • Requires the use of a single market maker that
    has monopolistic information on both the market
    orders and the limit order book.
  • There exist a floor, which is a physical location
    where market makers reside and interact with
    orders that come electronically to their terminal
    and with orders that come from floor brokers.
  • Market makers are required to announce quotes on
    a continuous basis that reflect both the limit
    order book interest and floor brokers intentions
  • As a result, market makers only provide the
    necessary liquidity from their own account when
    there is a lack of either a buy or a sell
    interest.
  • Typically this scenario occurs when there is a
    temporary disparity between supply and demand
    that asks for the market makers intervention in
    order to come up with an equilibrium price.
  • Floor-based markets where a centralized market
    making system is applied are the NYSE and the
    eight stock markets in Germany (Deutsche Börse).

47
Market Making???? ?????
  • Centralized market making system in an
    order-driven electronic market
  • Same as the floor-based market with a single
    market maker in the centralized dual role of
    matching buyers and sellers and providing the
    necessary liquidity when needed.
  • The only major difference is that in an order
    driven market there is neither a floor nor floor
    brokers to interact with the limit order book for
    providing extra liquidity.
  • Such a system was applied in the Amsterdam Stock
    Exchange (prior to its inclusion in Euronext).

48
Market Making???? ?????
  • Non-Centralized market making system in an
    order-driven electronic market.
  • There can be more than one per company
  • required to announce limit orders to buy and sell
    on a continuous basis
  • They do not possess any monopolistic information
    on the incoming orders or the limit order book.
  • They compete with investors for order flow.
  • This system is applied in Euronext, in the
    Italian Stock Exchange (ISE) and in the Athens
    Stock Exchange (ASE), among others.

49
Market Making???? ?????
50
Market Making???? ?????
51
Market Making???? ?????
  • Costs and Challenges of Applying a Market Making
    System to Emerging Markets Factors for
    Consideration
  • current exchange design and the costs of
    restructuring
  • current investors sentiment towards the exchange
    both domestically and internationally
  • the market design in countries hosting the target
    foreign capital
  • size of the emerging market.

52
Market Making???? ?????
  • 1- current exchange design and the costs of
    restructuring
  • The least costly to implement in terms of both
    machinery and technical personnel and supplies,
    is the noncentralized market making system.
  • The quote-driven market making system is much
    more costly as it requires more capital for the
    system to be fully functional.
  • The centralized (especially floor systems) are
    extremely costly.
  • This should not be a major problem in the UAE.

53
Market Making???? ?????
  • 2- Current Investors Sentiment Towards the
    Exchange - Domestically and Internationally
  • Market making has many requirements that are not
    currently available in the UAE, som of which are
  • Experienced financial researchers
  • Short selling, security borrowing, high
    liquidity, derivative securities to hedge MM
    portfolios.
  • Do we think of a centralized MM to be trust
    worthy.
  • Collusion is possible in Quote or non centralized

54
Market Making???? ?????
  • 3- Market Designs in Countries Hosting the Target
    Foreign Capital
  • Are foreigners used to our system
  • Do they trust our regulations and market
    participants
  • The answer is yes, due to
  • the increasing international interest in the UAE
  • the UAEs ability to adapt to new systems,
    methodologies and technologies.

55
Market Making???? ?????
  • 4- Size of the Emerging Market
  • Looking at the capitalization of the markets that
    employ either the centralized market making
    system or the quote-driven market making system,
    we observe that these are much larger on average
    than other markets that follow the
    non-centralized market making system.
  • The UAE markets are small once compares to quote
    and centralized markets

56
Market Making???? ?????
  • Conclusion
  • Noncentralized is the closest fit to the UAE.

57
What Are Conflicts of Interest and Why Are They
Important?????? ????? ??????? ???????
  • Financial intermediaries engage in a variety of
    activities to collect, produce, and distribute
    information. By providing large volume of each
    service the realize economies of scale and by
    providing multiple services, they realize
    economies of scope.
  • However, these services may be competing with one
    another, and this creates the potential for a
    conflict of interest (e.g. IBF and BF)

58
What Are Conflicts of Interest and Why Are They
Important?????? ????? ??????? ???????
  • The conflicts of interest may arise as the
    concealment of information or the dissemination
    of misleading information.
  • We care about these conflicts of interest because
    a reduction in the quality of information
    increases the presence of asymmetric information.
  • This will lead to adverse selection and moral
    hazard

59
Ethics and Conflicts of Interest???? ?????? ?
????? ???????
  • Conflicts of interest generate incentives to
    provide false or misleading information. This
    behavior is considered unethical.
  • One way to limit these conflicts is to make
    workers aware of the ethics issues at stake, so
    that they are less likely to engage in unethical
    behavior.

60
Types of Conflicts of Interest????? ????? ???????
  • Four areas of financial service activities that
    harbor the greatest potential for generating
    conflicts of interest. These are
  • Underwriting and research in investment banking
  • Auditing and consulting in accounting firms
  • Credit assessment and consulting in
    credit-rating agencies
  • Universal banking

61
Underwriting and Research in Investment
Banking????? ??????? ??? ????? ????? ?????????
?????? ??????? ???????? ?????? ?? ????? ???????
???????
  • Some investment banks both underwrite new
    securities sold to the public as well as provide
    research (recommendations) to the investing
    public
  • When revenues from underwriting exceed brokerage
    commissions, favorable research will attract more
    business, at the expense of unbiased
    recommendations to the investing public.

62
Underwriting and Research in Investment
Banking????? ??????? ??? ????? ????? ?????????
?????? ??????? ???????? ?????? ?? ????? ???????
???????
  • In initial public offerings of equity,
    underwriters direct the new shares as they wish,
    typically to their best clients or potential new
    clients.
  • Since most IPOs are underpriced, many of these
    shares are immediately sold for a profit (called
    spinning). This immediate profit may appear as
    nothing more than payment for future business.

63
Auditing and Consulting in Accounting
Firms??????? ?????? ?????? ?????????? ??? ?????
????????
  • The role of auditors in public firms is to
    provide an unbiased view of the financial reports
    to reduce asymmetric information between the
    firms management and the investing public.
  • By also providing management advisory services
    (such as systems support), the auditor has an
    incentive to fudge the audit if the fees from
    other services are substantial.

64
Auditing and Consulting in Accounting
Firms??????? ?????? ?????? ?????????? ??? ?????
????????
  • Auditors also have a conflict of interest since
    they are paid by the firm they audit. If the
    auditor gives an unfavorable audit report, the
    auditor may lose the auditing business as well.
  • A well known case of the failure of auditors to
    provide unbiased reports was Arthur Andersens
    audit of Enron.

65
Credit Assessment and Consulting in Credit-Rating
Agencies????? ?? ??????? ??? ?????? ????? ???????
  • Bond investors rely on credit-rating agency
    assessment of firms debt (debt ratings).
  • However, ratings are only provided when the firm
    pays the agency. Agencies, then, have an
    incentive provide better ratings to attract
    business.

66
Credit Assessment and Consulting in Credit-Rating
Agencies????? ?? ??????? ??? ?????? ????? ???????
  • Rating agencies have also started providing firms
    with other services, and have the same conflicts
    as auditors in this regard.

67
Universal Banking????? ??????? ??? ????? ???? ??
???? ????? ?? ?? ????
  • Universal banking refers to institutions that
    provide some combination of commercial banking,
    investment banking, and insurance services.

68
Universal Banking????? ??????? ??? ????? ???? ??
???? ????? ?? ?? ????
  • Issuers that use the underwriting services of a
    bank will also benefit from sale of its products
    to the banks other (retail) customers. Customers
    should expect unbiased advice, but may not get
    it.
  • Bank managers may push investing products of its
    affiliates, even if they arent in customers
    best interest.

69
Universal Banking????? ??????? ??? ????? ???? ??
???? ????? ?? ?? ????
  • Lenders with private (bad) information have an
    incentive to withhold the information during
    security issuances in order to get paid
    themselves, at the expenses of the investing
    public.
  • Lenders may offer favorable terms to secure
    future underwriting business.

70
Universal Banking????? ??????? ??? ????? ???? ??
???? ????? ?? ?? ????
  • Banks may use strong-arm tactics to sell its
    affiliate insurance products.

71
When Are Conflicts of Interest a Serious
Problem???? ???? ??????? ?? ??????? ????? ????
  • Conflicts of interest are a problem when they
    lead to a decreased flow of reliable information
    (increased asymmetric information).
  • However, even with potential conflicts, the
    incentives (financial gain) may not be present to
    actually act on them.

72
Conflicts of Interest Empirical Evidence.?????
??????? ?????? ?????
  • Empirical evidence suggests that rating agency
    debt ratings are unbiased, despite being paid by
    the firms.
  • Underwriting and commercial banking also appeared
    to be free from exploitations. Many banks
    spun-off their investment banking activities to
    separate the functions.

73
Conflicts of Interest Empirical Evidence.?????
??????? ?????? ?????
  • Empirical evidence also suggests that the
    investing public recommendations are made by the
    underwriters analysts.
  • However, when temporary rewards to highly trusted
    firms may extract reputational rents from the
    investing public by seeking short-term gains at
    the expense of their future reputation.

74
Suggested actions to minimize conflict of
interest and fraudulent practices.?????? ??????
????? ??????? ?????????? ????? ???????
  • Beside
  • A- the known laws (SCA law, Company law, fraud
    laws, fin markets law, banking laws, exchangers
    law)
  • B- and the monitoring and examining of the SCA,
    Government agencies, internal and external
    auditing
  • Establish a Public Company Accounting Oversight
    Board to supervise accounting firms.
  • Prohibit public accounting firms from engaging in
    nonaudit services to a client it is also
    auditing.
  • Members of the boards audit committee must be
    independent.

75
Suggested actions to minimize conflict of
interest and fraudulent practices.?????? ??????
????? ??????? ?????????? ????? ???????
  • Require the reporting of off-balance sheet
    activities.
  • Increase the charges for white-collar crimes and
    obstruction.

76
Suggested actions to minimize conflict of
interest and fraudulent practices.?????? ??????
????? ??????? ?????????? ????? ???????
  • Firms must severe the link between underwriting
    and research activities.
  • Firms must make public analyst recommendations
    and target prices.

77
Suggested actions to minimize conflict of
interest and fraudulent practices.?????? ??????
????? ??????? ?????????? ????? ???????
  • Brokerage firms required to obtain third-party,
    independent research for their clients.
  • Massive fines and very harsh penalties even for
    the smallest of violations.

78
Policies to Remedy Conflicts of Interest??????
?????? ?? ?????? ?????? ?????? ???????
  • A trade-off between potential conflicts of
    interest and economies of scale exists. Simply
    eliminating any potential conflict may not be the
    best solution
  • The existence of a conflict of interest does not
    mean that the conflict will have severe
    consequences.
  • Even if incentives to exploit conflicts are high,
    eliminating the conflict may be worse if it
    reduces the flow of reliable information.

79
Policies to Remedy Conflicts of Interest??????
?????? ?? ?????? ?????? ?????? ???????
  • Leave It to the Market an appealing approach
    that relies on market forces, but has the problem
    that the market has a short memory for past
    problems.
  • Regulate for Transparency regulate mandatory
    disclosure, even if it is more costly than the
    information provided.

80
Policies to Remedy Conflicts of Interest??????
?????? ?? ?????? ?????? ?????? ???????
  • Supervisory Oversight force firms to provide
    private information to a supervisor, who can act
    on it as deemed necessary.
  • Separation of Functions separate those functions
    that create conflicts, either within firms or (in
    extreme cases) by not allowing those functions
    within the same firm.

81
Policies to Remedy Conflicts of Interest??????
?????? ?? ?????? ?????? ?????? ???????
  • Socialization of Information Production look to
    public funding for information providers, such as
    credit agencies.
  • Non government societies, peer pressure and the
    code of ethics.

82
(No Transcript)
83
Efficient Market Hypothesis????? ????? ?????
  • This equation tells us that current prices in a
    financial market will be set so that the optimal
    forecast of a securitys return using all
    available information equals the securitys
    equilibrium return.
  • ???? ?????? ??????? ????? ????? ?????? ???????
    ??? ??? ???? ????????? ??????? ???? ????????.
  • Financial economists state it more simply A
    securitys price fully reflects all available
    information in an efficient market.
  • Efficient market condition holds even if there
    are uninformed, irrational participants in market

84
Rationale Behind the Hypothesis ??? ??????? ??
???? ??? ????????
  • When an unexploited profit opportunity arises on
    a security (so-called because, on average, people
    would be earning more than they should, given the
    characteristics of that security), investors will
    rush to buy until the price rises to the point
    that the returns are normal again.

85
Rationale Behind the Hypothesis (cont.) ???
??????? ?? ???? ??? ????????
  • In an efficient market, all unexploited profit
    opportunities will be eliminated.
  • Not every investor need be aware of every
    security and situation, as long as a few keep
    their eyes open for unexploited profit
    opportunities, they will eliminate the profit
    opportunities that appear because in so doing,
    they make a profit.

86
Example on elimination of unexploited profits
87
Stronger Version of the Efficient Market
Hypothesis ???? ???? ?????? ????? ?????
  • Many financial economists take the EMH one step
    further in their analysis of financial markets.
    Not only do they define an efficient market as
    one in which expectations are optimal forecasts
    using all available information, but they also
    add the condition that an efficient market is one
    in which prices are always correct and reflect
    market fundamentals (items that have a direct
    impact on future income streams of the
    securities)
  • ??????? ????? ??? ??????? ??? ??????. ????????
    ????? ??? ????????? ???????? ????? ?????? ?????
    ?????.

88
Stronger Version of the Efficient Market
Hypothesis (2)
  • This stronger view of market efficiency has
    several important implications in the academic
    field of finance
  • It implies that in an efficient capital market,
    one investment is as good as any other because
    the securities prices are correct. ????
    ??????????? ???? ??? ?????? ?????? ?????? ???????
  • It implies that a securitys price reflects all
    available information about the intrinsic value
    of the security.
  • ????? ?????? ???? ???? ????????? ????????
    ????????? ?????? ?????? ??????

89
Stronger Version of the Efficient Market
Hypothesis (2)
  • It implies that security prices can be used by
    managers of both financial and nonfinancial firms
    to assess their cost of capital (cost of
    financing their investments) accurately and hence
    that security prices can be used to help them
    make the correct decisions about whether a
    specific investment is worth making or not.
  • ????? ??????? ?? ????? ????? ??? ????? ????
    ???????? ?? ????? ????????

90
Evidence on Efficient Market Hypothesis ???????
???????
  • Favorable Evidence ?????? ?????? ???????
  • Investment analysts and mutual funds don't beat
    the market
  • Stock prices reflect publicly available info
    anticipated announcements don't affect stock
    price
  • Stock prices and exchange rates close to random
    walk if predictions of ?P big, Rof gt R ?
    predictions of ?P small
  • Technical analysis does not outperform market

91
Evidence in Favor of Market Efficiency
  • Performance of Investment Analysts and Mutual
    Funds should not be able to consistently beat the
    market
  • ?? ???? ???? ?? ???? ???? ?????? ???? ?? ????
    ????? ????? ?????? ??????
  • The Investment Dartboard often beats
    investment managers.
  • Mutual funds not only do not outperform the
    market on average, but when they are separated
    into groups according to whether they had the
    highest or lowest profits in a chosen period, the
    mutual funds that did well in the first period do
    not beat the market in the second period.

92
Evidence in Favor of Market Efficiency
  • Performance of Investment Analysts and Mutual
    Funds should not be able to consistently beat the
    market
  • Investment strategies using inside information is
    the only proven method to beat the market. It
    is illegal to trade on such information, but that
    is not true in all countries.
  • ??????? ??????? ????? ???? ?? ???? ????? ??
    ?????? ??? ??????? ?????? ??? ?? ???? ????? ?????
    ?????? ????????

93
Evidence in Favor of Market Efficiency
  • Do Stock Prices Reflect Publicly Available
    Information as the EMH predicts they will?
  • Thus if information is already publicly
    available, a positive announcement about a
    company will not, on average, raise the price of
    its stock because this information is already
    reflected in the stock price.
  • ??? ???? ??????? ???? ???? ????????? ??? ???????
    ?? ????? ??? ????? ?? ?????? ??? ??? ??? ???????
    ????? ???? ?????? ??????

94
Evidence in Favor of Market Efficiency
  • Do Stock Prices Reflect Publicly Available
    Information as the EMH predicts they will?
  • Early empirical evidence confirms favorable
    earnings announcements or announcements of stock
    splits (a division of a share of stock into
    multiple shares, which is usually followed by
    higher earnings) do not, on average, cause stock
    prices to rise.
  • ???????? ??????? ????? ?? ??????? ?? ????? ??????
    ?????? ?? ?? ????? ?? ????????? ?? ?????? ?????
    ?? ?? ???? ???

95
Evidence in Favor of Market Efficiency
  • Random-Walk Behavior of Stock Prices that is,
    future changes in stock prices should, for all
    practical purposes, be unpredictable
  • ????? ??? ???????? ??????? ????????? ??????
    ??????
  • If stock is predicted to rise, people will buy to
    equilibrium level, if stock is predicted to fall,
    people will sell to equilibrium level (both in
    concert with EMH)
  • Thus, if stock prices were predictable, thereby
    causing the above behavior, price changes would
    be near zero, which has not been the case
    historically

96
Evidence in Favor of Market Efficiency
  • Technical Analysis means to study past stock
    price data and search for patterns such as trends
    and regular cycles, suggesting rules for when to
    buy and sell stocks
  • ??????? ?????? ????? ????? ??? ????? ????? ??????
  • The EMH suggests that technical analysis is a
    waste of time
  • The simplest way to understand why is to use the
    random-walk result that holds that past stock
    price data cannot help predict changes.
    Therefore, technical analysis, which relies on
    such data to produce its forecasts, cannot
    successfully predict changes in stock prices

97
Evidence on Efficient Market Hypothesis
  • Unfavorable Evidence ????? ???? ??? ???????
  • Small-firm effect small firms have abnormally
    high returns
  • January effect high returns in January
  • Market overreaction
  • Excessive volatility
  • Mean reversion
  • New information is not always immediately
    incorporated into stock prices

98
THE PRACTICING MANAGER Implications for
Investing????? ??????? ???????? ???????
??????????
  • How valuable are published reports by investment
    advisors?
  • Should you be skeptical of hot tips?
  • Do stock prices always rise when there is good
    news?
  • Efficient Markets prescription for investor

99
Implications for Investing
  • How valuable are published reports by investment
    advisors?
  • ?? ?? ???? ???????? ??????? ?? ????? ????????

100
Implications for Investing
  • Should you be skeptical of hot tips?
  • ?? ??? ?? ??????? ??????? ?????? ???? ???? ???
    ????? ???????
  • YES. The EMH indicates that you should be
    skeptical of hot tips since, if the stock market
    is efficient, it has already priced the hot tip
    stock so that its expected return will equal the
    equilibrium return.
  • Thus, the hot tip is not particularly valuable
    and will not enable you to earn an abnormally
    high return.

101
Implications for Investing
  • Should you be skeptical of hot tips?
  • As soon as the information hits the street, the
    unexploited profit opportunity it creates will be
    quickly eliminated.
  • The stocks price will already reflect the
    information, and you should expect to realize
    only the equilibrium return.

102
Implications for Investing
  • Do stock prices always rise when there is good
    news?
  • ?? ?????? ??????? ??????? ?? ???? ????? ????
    ???????
  • NO. In an efficient market, stock prices will
    respond to announcements only when the
    information being announced is new and
    unexpected.
  • So, if good news was expected (or as good as
    expected), there will be no stock price response.
  • And, if good news was unexpected (or not as good
    as expected), there will be a stock price
    response.

103
Implications for Investing
  • Efficient Markets prescription for investor
  • ????? ????? ?????? ???? ?? ?????? ?????????
  • Investors should not try to outguess the market
    by constantly buying and selling securities. This
    process does nothing but incur commissions costs
    on each trade.

104
Implications for Investing
  • Efficient Markets prescription for investor
  • ?????? ????????? ???? ?? ??????? ??????? ???? ??
    ????? ?????
  • Instead, the investor should pursue a buy and
    hold strategypurchase stocks and hold them for
    long periods of time. This will lead to the same
    returns, on average, but the investors net
    profits will be higher because fewer brokerage
    commissions will have to be paid.

105
Implications for Investing
  • Efficient Markets prescription for investor
  • ??????? ?? ?????? ??????? ??? ????? ????? ??????
    ???? ???? ?????????? ?????????? ?? ??????
    ????????? ???????? ????????
  • It is frequently a sensible strategy for a small
    investor, whose costs of managing a portfolio may
    be high relative to its size, to buy into a
    mutual fund rather than individual stocks.
    Because the EMH indicates that no mutual fund can
    consistently outperform the market, an investor
    should not buy into one that has high management
    fees or that pays sales commissions to brokers
    but rather should purchase a no-load
    (commission-free) mutual fund that has low
    management fees.

106
Behavioral Finance ??????? ???????
  • Dissatisfaction with using the EMH to explain
    events like 1987s Black Monday gave rise to the
    new field of behavioral finance, in which
    concepts from psychology, sociology, and other
    social sciences are applied to understand the
    behavior of securities prices
  • ??? ??????? ????? ????? ?????? ?? ???????
    ???????? ???? ??????? ??????????
  • EMH suggests that smart money would engage in
    short sales to combat overpriced securities, yet
    short sale volume is low, leading to behavior
    theories about loss aversion
  • Other behavior analysis points to investor
    overconfidence as perpetuating stock price
    bubbles

107
Why Should Capital MarketsBe Efficient??????
??? ?? ???? ??????? ?????
  • The premises of an efficient market
  • A large number of competing profit-maximizing
    participants analyze and value securities, each
    independently of the others
  • New information regarding securities comes to the
    market in a random fashion
  • Profit-maximizing investors adjust security
    prices rapidly to reflect the effect of new
    information
  • Conclusion the expected returns implicit in the
    current price of a security should reflect its
    risk

108
AlternativeEfficient Market Hypotheses (EMH)??
?????? ????? ????? ??????
  • Random Walk Hypothesis changes in security
    prices occur randomly
  • ?????? ????????
  • Fair Game Model current market price reflect
    all available information about a security and
    the expected return based upon this price is
    consistent with its risk
  • ?????? ???????
  • Efficient Market Hypothesis (EMH) - divided into
    three sub-hypotheses depending on the information
    set involved
  • 3 ??????? ?????? ????? ??????

109
Efficient Market Hypotheses (EMH)
  • Weak-Form EMH - prices reflect all
    security-market information
  • ?????? ???????
  • Semistrong-form EMH - prices reflect all public
    information
  • ?????? ????????
  • Strong-form EMH - prices reflect all public and
    private information
  • ?????? ??????

110
Weak-Form EMH????? ????????? ????????? ??
??????? ????? ??????? ?? ???? ?? ??? ?? ????? ???
???? ????? ?????? ????????
  • Current prices reflect all security-market
    information, including the historical sequence of
    prices, rates of return, trading volume data, and
    other market-generated information
  • This implies that past rates of return and other
    market data should have no relationship with
    future rates of return

111
Semistrong-Form EMH????????? ?????? ?????? ????
?? ??????? ???????? ?? ???? ?? ??? ?? ????? ???
???? ????? ?????? ????????
  • Current security prices reflect all public
    information, including market and non-market
    information
  • This implies that decisions made on new
    information after it is public should not lead to
    above-average risk-adjusted profits from those
    transactions

112
Strong-Form EMH????? ????????? ??????? ???????
??????? ?? ???? ?? ??? ?? ????? ??? ???? ?????
?????? ????????
  • Stock prices fully reflect all information from
    public and private sources
  • This implies that no group of investors should be
    able to consistently derive above-average
    risk-adjusted rates of return
  • This assumes perfect markets in which all
    information is cost-free and available to
    everyone at the same time

113
Tests and Results of Weak-Form EMH?????? ???????
?????? ???????
  • Statistical tests of independence between rates
    of return
  • Autocorrelation tests have mixed results
  • Active Vs. Buy and Hold show varying results

114
Tests and Results of Weak-Form EMH????? ??? ???
?????? ??????? ?????? ???? ???
  • Comparison of trading rules to a buy-and-hold
    policy is difficult because trading rules can be
    complex and there are too many to test them all
  • Filter rules yield above-average profits, but
    only before taking into account transactions
    costs
  • Trading rule results have been mixed, and most
    have not been able to beat a buy-and-hold policy
  • Results generally support the weak-form EMH, but
    results are not unanimous

115
Tests of the Semistrong Form of Market
Efficiency ?????? ??????? ?????? ????????
  • These tests involve a joint hypothesis and are
    dependent both on market efficiency and the asset
    pricing model used
  • ????? ??????? ????????
  • They use
  • 1- Event studies ?????? ?????
  • 2- Trading volumes and price ?????? ????? ?????
    ???? ???????
  • 3- Multipliers ?????????

116
Tests and Results of Semistrong-Form EMH
  • The January Anomaly ????? ???????
  • Stocks with negative returns during the prior
    year had higher returns right after the first of
    the year
  • Tax selling toward the end of the year has been
    mentioned as the reason for this phenomenon
  • Such a seasonal pattern is inconsistent with the
    EMH

117
Tests and Results of Semistrong-Form EMH
  • Other calendar effects
  • All the markets cumulative advance occurs during
    the first half of trading months
  • Monday/weekend returns were significantly negative

118
Tests and Results of Semistrong-Form EMH
  • The size effect (total market value) ?????
    ??????? ???????
  • The studies indicate that risk-adjusted returns
    for extended periods indicate that the small
    firms consistently experienced significantly
    larger risk-adjusted returns than large firms
  • The small-firm effect is not stable from year to
    year
  • Firm size is a major efficient market anomaly

119
Tests and Results of Semistrong-Form EMH
  • Neglected Firms ????? ??????? ???????
  • Firms divided by number of analysts following a
    stock
  • Neglected firm effect caused by lack of
    information and limited institutional interest
  • Neglected firm concept applied across size classes

120
Tests and Results of Semistrong-form EMH
  • Trading volume ????? ??? ???????
  • Studied relationship between returns, market
    value, and trading activity.
  • No significant difference was found between the
    mean returns of the highest and lowest trading
    activity portfolios

121
Tests and Results of Semistrong-Form EMH
  • Ratio of Book Value of a firms Equity to Market
    Value of its equity ????? ????? ???????
  • Significant positive relationship found between
    current values for this ratio and future stock
    returns
  • Results inconsistent with the EMH
  • Size and BV/MV dominate other ratios such as E/P
    ratio or leverage ????? ????? ???????

122
Evidence Against Market Efficiency
  • Market Overreaction recent research suggests
    that stock prices may overreact to news
    announcements and that the pricing errors are
    corrected only slowly
  • ????? ?????? ??? ????? ????????? ???????
  • When corporations announce a major change in
    earnings, say, a large decline, the stock price
    may overshoot, and after an initial large
    decline, it may rise back to more normal levels
    over a period of several weeks.
  • This violates the EMH because an investor could
    earn abnormally high returns, on average, by
    buying a stock immediately after a poor earnings
    announcement and then selling it after a couple
    of weeks when it has risen back to normal levels.

123
Evidence Against Market Efficiency
  • Excessive Volatility the stock market appears to
    display excessive volatility that is,
    fluctuations in stock prices may be much greater
    than is warranted by fluctuations in their
    fundamental value.
  • ????? ??????? ??????
  • Researchers have found that fluctuations in the
    SP 500 stock index could not be justified by the
    subsequent fluctuations in the dividends of the
    stocks making up this index.
  • Other research finds that there are smaller
    fluctuations in stock prices when stock markets
    are closed, has produced a consensus that stock
    market prices appear to be driven by factors
    other than fundamentals.

124
Evidence Against Market Efficiency
  • Mean Reversion Some researchers have found that
    stocks with low returns today tend to have high
    returns in the future, and vice versa.
  • ????? ?????? ??? ???? ?????
  • Hence stocks that have done poorly in the past
    are more likely to do well in the future because
    mean reversion indicates that there will be a
    predictable positive change in the future price,
    suggesting that stock prices are not a random
    walk.
  • Newer data is less conclusive nevertheless, mean
    reversion remains controversial.

125
Evidence Against Market Efficiency
  • New Information Is Not Always Immediately
    Incorporated into Stock Prices
  • ????? ???? ????? ?? ??????? ?? ????????? ???????
  • Although generally true, recent evidence suggests
    that, inconsistent with the efficient market
    hypothesis, stock prices do not instantaneously
    adjust to profit announcements.
  • Instead, on average stock prices continue to rise
    for some time after the announcement of
    unexpectedly high profits, and they continue to
    fall after surprisingly low profit announcements.

126
Tests and Results of Semistrong-Form EMH
  • ??????? ?????? ????? ?? ?????? ????? ?????
    ???????
  • Event studies examine how fast stock prices
    adjust to specific significant economic events
  • Stock split studies show that splits do not
    result in abnormal gains after the split
    announcement, but before
  • Initial public offerings seems to be underpriced
    by almost 18, but that varies over time, and the
    price is adjusted within one day after the
    offering
  • Listing of a stock on an national exchange may
    offer some short term profit opportunities for
    investors

127
Tests and Results of Semistrong-Form EMH
  • Event studies (continued)
  • Stock prices quickly adjust to unexpected world
    events and economic news and hence do not provide
    opportunities for abnormal profits
  • Announcements of accounting changes are quickly
    adjusted for and do not seem to provide
    opportunities
  • Stock prices rapidly adjust to corporate events
    such as mergers and offerings
  • The above studies provide support for the
    semistrong-form EMH

128
Summary on the Semistrong-Form EMH
  • Evidence is mixed
  • ???? ?????? ????? ???? ?? ????? ??? ???????
    ???????
  • strong support from numerous event studies
  • Studies on predicting rates of return for a
    cross-section of stocks indicates markets are not
    semistrong efficient (e.g. use of multipliers
    like PE, or calendar effects

129
Tests and Results of Strong-Form EMH ??????
??????? ?????? ??????
  • Strong-form EMH contends that stock prices fully
    reflect all information, both public and private
  • This implies that no group of investors has
    access to private information that will allow
    them to consistently earn above-average profits

130
Testing Groups of Investors
  • Corporate insiders
  • Stock exchange specialists
  • Security analysts
  • Professional money managers (e.g. investment
    funds managers)

131
Corporate Insider Trading ?????? ???? ?????
?????????
  • Corporate insiders include major corporate
    officers, directors, and owners of 10 or more of
    any equity class of securities
  • Insiders must report to the SEC each month on
    their transactions in the stock of the firm for
    which they are insiders
  • These insider trades are made public about six
    weeks later and allowed to be studied

132
Corporate Insider Trading ???????? ???? ??
????????? ?????? ???? ???? ???? ?? ???????????
?? ????? ??? ??? ??????? ??????
  • Corporate insiders generally experience
    above-average profits especially on purchase
    transaction
  • This implies that many insiders had private
    information from which they derived above-average
    returns on their company stock

133
Corporate Insider Trading
  • Studies showed that public investors who traded
    with the insiders based on announced transactions
    would have enjoyed excess risk-adjusted returns
    (after commissions), but the markets now seem to
    have eliminated this inefficiency (soon after it
    was discovered)

134
Stock Exchange Specialists ???????? ???? ??
???????? ????? ?????? ??? ??????? ?? ???? ?????
?????? ?????? ???? ???? ???? ?? ???????? ??
????? ??? ??? ??????? ??????
  • Specialists have monopolistic access to
    information about unfilled limit orders
  • You would expect specialists to derive
    above-average returns from this information
  • The data generally supports this expectation

135
Security Analysts ???????? ???? ?? ????????
???????? ????? ?????? ??? ??????? ?? ???? ?????
?????? ?????? ???? ???? ???? ?? ???????? ??
????? ??? ??? ??????? ??????
  • Tests have considered whether it is possible to
    identify a set of analysts who have the ability
    to select undervalued stocks
  • This looks at whether, after a stock selection by
    an analyst is made known, a significant abnormal
    return is available to those who follow their
    recommendations

136
The Value Line Enigma (PSE is considering similar
system) ???????? ???? ?? ??????????? ?? VL
?????? ???? ???? ???? ?? ??????? ?? ????? ???
??? ??????? ??????
  • Value Line (VL) publishes financial information
    on about 1,700 stocks
  • The report includes a timing rank from 1 down to
    5
  • Firms ranked 1 substantially outperform the
    market
  • Firms ranked 5 substantially underperform the
    market
  • Changes in rankings result in a fast price
    adjustment

137
Professional Money Managers ???????? ???? ??
????? ????????? ????? ?????? ??? ??????? ?? ????
????? ?????? ?????? ???? ???? ???? ?? ????????
?? ????? ??? ??? ??????? ??????
  • Trained professionals, working full time at
    investment management
  • If any investor can achieve above-average
    returns, it should be this group
  • If any non-insider can obtain inside information,
    it would be this group due to the extensive
    management interviews that they conduct and due
    to high stakes in owned firms

138
Performance of Professional Money Managers
  • Most tests examine mutual funds
  • New tests also examine trust departments,
    insurance companies, and investment advisors
  • Risk-adjusted, after expenses, returns of mutual
    funds generally show that most funds did not
    match aggregate market performance

139
Conclusions Regarding the Strong-Form EMH
  • ???????? ???? ?? ????? ??? ??? ??????? ?????? ??
    ???? ???????
  • Mixed results, but not much support
  • Tests for corporate insiders and stock exchange
    specialists do not support the hypothesis (Both
    groups seem to have monopolistic access to
    important information and use it to derive
    above-average returns)

140
Conclusions Regarding the Strong-Form EMH
  • Tests results for analysts are concentrated on
    Value Line rankings
  • Results have changed over time. Currently tend to
    support EMH
  • Individual analyst recommendations seem to
    contain significant information
  • Performance of professional money managers seem
    to provide support for strong-form EMH

141
Efficient Markets and Technical Analysis?????
????? ?????? ???????? ?????
  • Assumptions of technical analysis directly oppose
    the notion of efficient markets
  • ??????? ????? ?? ????? ?????? ????? ??? ?????????
    ??? ?????? ??????
  • Technicians believe that new information is not
    immediately available to everyone, but
    disseminated from the informed professional first
    to the aggressive investing public and then to
    the masses

142
Efficient Markets and Technical Analysis ?????
????? ?????? ???????? ?????
  • Technicians also believe that investors do not
    analyze information and act immediately - it
    takes time
  • ?? ?? ???????? ??????? ?????? ?? ?????????? ??
    ????? ????????? ????? ??? ???? ????? ?? ???????
    ???? ??????? ?????????? ????
  • Therefore, stock prices move to a new equilibrium
    after the release of new information in a gradual
    manner, causing trends in stock price movements
    that persist for periods

143
Efficient Markets and Technical Analysis ?????
????? ?????? ???????? ?????
  • ???? ?????? ?? ?????????????? ?????? ???? ?? ????
    ???? ?????? ??? ??? ??????? ????? ?????
  • Technical analysts develop systems to detect
    movement to a new equilibrium (breakout) and
    trade based on that
  • Contradicts rapid price adjustments indicated by
    the EMH
  • If the capital market is weak-form efficient, a
    trading system that depends on past trading data
    can have no value

144
Efficient Markets and Fundamental Analysis ?????
????? ?????? ???????? ???????
  • ??????? ??????? ???? ????? ???? ?????? ??????
    ????? ?????? ?? ????????? ???????? ??????
  • Fundamental analysts believe that there is a
    basic intrinsic value for the aggregate stock
    market, various industries, or individual
    securities and these values depend on underlying
    economic factors
  • Investors should determine the intrinsic value of
    an investment at a point in time and compare it
    to the market price

145
Efficient Markets and Fundamental Analysis ?????
????? ?????? ???????? ???????
  • ????? ??? ??????? ???? ????? ??? ??? ???????
  • If you can do a superior job of estimating
    intrinsic value you can make superior market
    timing decisions and generate above-average
    returns
  • This involves aggregate market analysis, industry
    analysis, company analysis, and portfolio
    management
  • Intrinsic value analysis should start with
    aggregate market analysis

146
Efficient Markets and Investment Fund Management
????? ????? ?????? ?????? ??????? ???????????
  • ??????? ??????? ???????? ?? ????? ????? ???? ??
    ?????? ???? ???????
  • Investment Fund Managers with Superior Analysts
  • concentrate efforts in stocks that do not receive
    the attention given by institutional Investment
    Fund managers to the top-tier stocks
  • the market for these neglected stocks may be less
    efficient than the market for large well-known
    stocks

147
Efficient Markets and Investment Fund Management
????? ????? ?????? ?????? ??????? ???????????
  • ??????? ???????? ?????? ??? ???? ???? ??????
    ????? ????? ??????? ???????? ?????
  • Investment Fund Managers without Superior
    Analysts
  • Determine and quantify your client's risk
    preferences
  • Construct the appropriate portfolio
  • Diversify completely on a global basis to
    eliminate all unsystematic risk
  • Maintain the desired risk level by rebalancing
    the portfolio whenever necessary
  • Minimize total transaction costs

148
The Rationale and Use of Index Funds???? ?????
?????? ?????? ????? ??? ?? ?????? ??? ???? ?????
????? ????? ??????? ??????? ?? ????? ?????????
?????? ????? ???? ????? ?????
About PowerShow.com