samuel-silver
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efficiency
Tests of market efficiency look at the whether specific investment strategies earn
excess returns. Some tests also account for transactions costs and execution feasibility.
Since an excess return on an investment is the difference between the actual and expected
return on that investment, there is implicit in every test of market efficiency a model for this
expected return. In some cases, this expected return adjusts for risk using the capital asset
pricing model or the arbitrage pricing model, and in others the expected return is based
upon returns on similar or equivalent investments. In every case, a test of market efficiency
is a joint test of market efficiency and the efficacy of the model used for expected returns.
When there is evidence of excess returns in a test of market efficiency, it can indicate that
markets are inefficient or that the model used to compute expected returns is wrong or both.
While this may seem to present an insoluble dilemma, if the conclusions of the study are
insensitive to different model specifications, it is much more likely that the results are being
driven by true market inefficiencies and not just by model misspecificatio
Tests of market efficiency look at the whether specific investment strategies earn
excess returns. Some tests also account for transactions costs and execution feasibility.
Since an excess return on an investment is the difference between the actual and expected
return on that investment, there is implicit in every test of market efficiency a model for this
expected return. In some cases, this expected return adjusts for risk using the capital asset
pricing model or the arbitrage pricing model, and in others the expected return is based
upon returns on similar or equivalent investments. In every case, a test of market efficiency
is a joint test of market efficiency and the efficacy of the model used for expected returns.
When there is evidence of excess returns in a test of market efficiency, it can indicate that
markets are inefficient or that the model used to compute expected returns is wrong or both.
While this may seem to present an insoluble dilemma, if the conclusions of the study are
insensitive to different model specifications, it is much more likely that the results are being
driven by true market inefficiencies and not just by model misspecificatio
2
more likely to have under valued stocks. Given the size of the universe of stocks, this not
only saves time for the analyst, but increases the odds significantly of finding under and
over valued stocks. For instance, some efficiency studies suggest that stocks that are
'neglected' be institutional investors are more likely to be undervalued and earn excess
returns. A strategy that screens firms for low institutional investment (as a percentage of the
outstanding stock) may yield a sub-sample of neglected firms, which can then be valued
using valuation models, to arrive at a portfolio of undervalued firms. If the research is
correct the odds of finding undervalued firms should increase in this sub-sample.
What is an efficient market?
An efficient market is one where the market price is an unbiased estimate of the true
value of the investment. Implicit in this derivation are several key concepts -
(a) Contrary to popular view, market efficiency does not require that the market price be
equal to true value at every point in time. All it requires is that errors in the market price be
unbiased, i.e., that prices can be greater than or less than true value, as long as these
deviations are random1.
(b) The fact that the deviations from true value are random implies, in a rough sense, that
there is an equal chance that stocks are under or over valued at any point in time, and that
these deviations are uncorrelated with any observable variable. For instance, in an efficient
market, stocks with lower PE ratios should be no more or less likely to under valued than
stocks with high PE ratios.
(c) If the deviations of market price from true value are random, it follows that no group of
investors should be able to consistently find under or over valued stocks using any
investment strategy.
1 Randomness implies that there is an equal chance that stocks are under or over valued at any point in
time.
more likely to have under valued stocks. Given the size of the universe of stocks, this not
only saves time for the analyst, but increases the odds significantly of finding under and
over valued stocks. For instance, some efficiency studies suggest that stocks that are
'neglected' be institutional investors are more likely to be undervalued and earn excess
returns. A strategy that screens firms for low institutional investment (as a percentage of the
outstanding stock) may yield a sub-sample of neglected firms, which can then be valued
using valuation models, to arrive at a portfolio of undervalued firms. If the research is
correct the odds of finding undervalued firms should increase in this sub-sample.
What is an efficient market?
An efficient market is one where the market price is an unbiased estimate of the true
value of the investment. Implicit in this derivation are several key concepts -
(a) Contrary to popular view, market efficiency does not require that the market price be
equal to true value at every point in time. All it requires is that errors in the market price be
unbiased, i.e., that prices can be greater than or less than true value, as long as these
deviations are random1.
(b) The fact that the deviations from true value are random implies, in a rough sense, that
there is an equal chance that stocks are under or over valued at any point in time, and that
these deviations are uncorrelated with any observable variable. For instance, in an efficient
market, stocks with lower PE ratios should be no more or less likely to under valued than
stocks with high PE ratios.
(c) If the deviations of market price from true value are random, it follows that no group of
investors should be able to consistently find under or over valued stocks using any
investment strategy.
1 Randomness implies that there is an equal chance that stocks are under or over valued at any point in
time.
1
CHAPTER 6
MARKET EFFICIENCY – DEFINITION, TESTS AND EVIDENCE
What is an efficient market? What does it imply for investment and valuation
models? Clearly, market efficiency is a concept that is controversial and attracts strong
views, pro and con, partly because of differences between individuals about what it really
means, and partly because it is a core belief that in large part determines how an investor
approaches investing. This chapter provides a simple definition of market efficiency,
considers the implications of an efficient market for investors and summarizes some of the
basic approaches that are used to test investment schemes, thereby proving or disproving
market efficiency. It also provides a summary of the voluminous research on whether
markets are efficient.
Market Efficiency and Investment Valuation
The question of whether markets are efficient, and if not, where the inefficiencies lie,
is central to investment valuation. If markets are, in fact, efficient, the market price provides
the best estimate of value, and the process of valuation becomes one of justifying the market
price. If markets are not efficient, the market price may deviate from the true value, and the
process of valuation is directed towards obtaining a reasonable estimate of this value. Those
who do valuation well, then, will then be able to make 'higher' returns than other investors,
because of their capacity to spot under and over valued firms. To make these higher returns,
though, markets have to correct their mistakes – i.e. become efficient – over time. Whether
these corrections occur over six months or five years can have a profound impact in which
valuation approach an investor chooses to use and the time horizon that is needed for it to
succeed.
There is also much that can be learnt from studies of market efficiency, which
highlight segments where the market seems to be inefficient. These 'inefficiencies' can
provide the basis for screening the universe of stocks to come up with a sub-sample that is
CHAPTER 6
MARKET EFFICIENCY – DEFINITION, TESTS AND EVIDENCE
What is an efficient market? What does it imply for investment and valuation
models? Clearly, market efficiency is a concept that is controversial and attracts strong
views, pro and con, partly because of differences between individuals about what it really
means, and partly because it is a core belief that in large part determines how an investor
approaches investing. This chapter provides a simple definition of market efficiency,
considers the implications of an efficient market for investors and summarizes some of the
basic approaches that are used to test investment schemes, thereby proving or disproving
market efficiency. It also provides a summary of the voluminous research on whether
markets are efficient.
Market Efficiency and Investment Valuation
The question of whether markets are efficient, and if not, where the inefficiencies lie,
is central to investment valuation. If markets are, in fact, efficient, the market price provides
the best estimate of value, and the process of valuation becomes one of justifying the market
price. If markets are not efficient, the market price may deviate from the true value, and the
process of valuation is directed towards obtaining a reasonable estimate of this value. Those
who do valuation well, then, will then be able to make 'higher' returns than other investors,
because of their capacity to spot under and over valued firms. To make these higher returns,
though, markets have to correct their mistakes – i.e. become efficient – over time. Whether
these corrections occur over six months or five years can have a profound impact in which
valuation approach an investor chooses to use and the time horizon that is needed for it to
succeed.
There is also much that can be learnt from studies of market efficiency, which
highlight segments where the market seems to be inefficient. These 'inefficiencies' can
provide the basis for screening the universe of stocks to come up with a sub-sample that is
crypto market
In recent years, blockchain has gained widespread attention as an emerging technology for decentralization, transparency, and immutability in advancing online activities over public networks. As an essential market process, auctions have been well studied and applied in many business fields due to their efficiency and contributions to fair trade. Complementary features between blockchain and auction models trigger a great potential for research and innovation. On the one hand, the decentralized nature of blockchain can provide a trustworthy, secure, and cost-effective mechanism to manage the auction process; on the other hand, auction models can be utilized to design incentive and consensus protocols in blockchain architectures. These opportunities have attracted enormous research and innovation activities in both academia and industry; however, there is a lack of an in-depth review of existing solutions and achievements. In this paper, we conduct a comprehensive state-of-the-art survey of these two research topics. We review the existing solutions for integrating blockchain and auction models, with some application-oriented taxonomies generated. Additionally, we highlight some open research challenges and future directions towards integrated blockchain-auction models.
fraud the unmanaged risk
Investor Assistance (800) 732-0330 www.investor.gov
Investor Alert
Binary options and Fraud
The SEC’s Office of Investor Education and Advocacy and
the Commodity Futures Trading Commission’s Office of
Consumer Outreach (CFTC) are issuing this Investor Alert
to warn investors about fraudulent promotion schemes
involving binary options and binary options trading
platforms. These schemes allegedly involve, among other
things, the refusal to credit customer accounts or reimburse
funds to customers, identity theft, and manipulation of
software to generate losing trades.
Binary Options
Binary options differ from more conventional options
in significant ways. A binary option is a type of options
contract in which the payout will depend entirely on
the outcome of a yes/no proposition.
The yes/no proposition typically relates to whether
the price of a particular asset that underlies the binary
option will rise above or fall below a specified amount.
For example, the yes/no proposition connected to the
binary option might be something as straightforward
as whether the stock price of XYZ company will be
above $9.36 per share at 2:30 pm on a particular day,
or whether the price of silver will be above $33.40 per
ounce at 11:17 am on a particular day. once the option
holder acquires a binary option, there is no further
decision for the holder to make as to whether or not
to exercise the binary option because binary options
exercise automatically. Unlike other types of options,
a binary option does not give the holder the right to
purchase or sell the underlying asset. When the binary
option expires, the option holder will receive either a
pre-determined amount of cash or nothing at all. Given
the all-or-nothing payout structure, binary options are
sometimes referred to as “all-or-nothing options” or
“fixed-return options.”
Binary Options Trading Platforms
some binary options are listed on registered exchanges
or traded on a designated contract market that are
subject to oversight by United states regulators such
as the seC or CFtC, respectively, but this is only a
portion of the binary options market. Much of the
binary options market operates through Internet-based
trading platforms that are not necessarily complying
with applicable U.s. regulatory requirements. The
number of Internet-based trading platforms that offer
the opportunity to purchase and trade binary options
has surged in recent years. The increase in the number
of these platforms has resulted in an increase in the
number of complaints about fraudulent promotion
schemes involving binary options trading platforms.
Much of the binary options market operates
through Internet-based trading platforms that
are not necessarily complying with applicable
U.s. regulatory requirements and may be engag-
ing in illegal activity.
Investor Alert
Binary options and Fraud
The SEC’s Office of Investor Education and Advocacy and
the Commodity Futures Trading Commission’s Office of
Consumer Outreach (CFTC) are issuing this Investor Alert
to warn investors about fraudulent promotion schemes
involving binary options and binary options trading
platforms. These schemes allegedly involve, among other
things, the refusal to credit customer accounts or reimburse
funds to customers, identity theft, and manipulation of
software to generate losing trades.
Binary Options
Binary options differ from more conventional options
in significant ways. A binary option is a type of options
contract in which the payout will depend entirely on
the outcome of a yes/no proposition.
The yes/no proposition typically relates to whether
the price of a particular asset that underlies the binary
option will rise above or fall below a specified amount.
For example, the yes/no proposition connected to the
binary option might be something as straightforward
as whether the stock price of XYZ company will be
above $9.36 per share at 2:30 pm on a particular day,
or whether the price of silver will be above $33.40 per
ounce at 11:17 am on a particular day. once the option
holder acquires a binary option, there is no further
decision for the holder to make as to whether or not
to exercise the binary option because binary options
exercise automatically. Unlike other types of options,
a binary option does not give the holder the right to
purchase or sell the underlying asset. When the binary
option expires, the option holder will receive either a
pre-determined amount of cash or nothing at all. Given
the all-or-nothing payout structure, binary options are
sometimes referred to as “all-or-nothing options” or
“fixed-return options.”
Binary Options Trading Platforms
some binary options are listed on registered exchanges
or traded on a designated contract market that are
subject to oversight by United states regulators such
as the seC or CFtC, respectively, but this is only a
portion of the binary options market. Much of the
binary options market operates through Internet-based
trading platforms that are not necessarily complying
with applicable U.s. regulatory requirements. The
number of Internet-based trading platforms that offer
the opportunity to purchase and trade binary options
has surged in recent years. The increase in the number
of these platforms has resulted in an increase in the
number of complaints about fraudulent promotion
schemes involving binary options trading platforms.
Much of the binary options market operates
through Internet-based trading platforms that
are not necessarily complying with applicable
U.s. regulatory requirements and may be engag-
ing in illegal activity.
binary options

Binary options
A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all.[1][2] The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the NYSE American).[3]
While binary options may be used in theoretical asset pricing, they are prone to fraud in their applications and hence banned by regulators in many jurisdictions as a form of gambling.[4] Many binary option outlets have been exposed as fraudulent.[5] The U.S. FBI is investigating binary option scams throughout the world, and the Israeli police have tied the industry to criminal syndicates.[6][7][8] The European Securities and Markets Authority (ESMA) has banned retail binary options trading.[9] Australian Securities & Investments Commission (ASIC) considers binary options as a "high-risk" and "unpredictable" investment option, [10] and finally also banned binary options sale to retail investors in 2021.[11]
The FBI estimates that the scammers steal US$10 billion annually worldwide.[12] The use of the names of famous and respectable people such as Richard Branson to encourage people to buy fake "investments" is frequent and increasing.[13] Articles published in The Times of Israel newspaper explain the fraud in detail, using the experience of former insiders such as a job-seeker recruited by a fake binary options broker, who was told to "leave [his] conscience at the door".[14][15] Following an investigation by The Times of Israel, Israel's cabinet approved a ban on the sale of binary options in June 2017,[16] and a law banning the products was approved by the Knesset in October 2017.[17][18
Binary options
A binary option is a financial exotic option in which the payoff is either some fixed monetary amount or nothing at all.[1][2] The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The former pays some fixed amount of cash if the option expires in-the-money while the latter pays the value of the underlying security. They are also called all-or-nothing options, digital options (more common in forex/interest rate markets), and fixed return options (FROs) (on the NYSE American).[3]
While binary options may be used in theoretical asset pricing, they are prone to fraud in their applications and hence banned by regulators in many jurisdictions as a form of gambling.[4] Many binary option outlets have been exposed as fraudulent.[5] The U.S. FBI is investigating binary option scams throughout the world, and the Israeli police have tied the industry to criminal syndicates.[6][7][8] The European Securities and Markets Authority (ESMA) has banned retail binary options trading.[9] Australian Securities & Investments Commission (ASIC) considers binary options as a "high-risk" and "unpredictable" investment option, [10] and finally also banned binary options sale to retail investors in 2021.[11]
The FBI estimates that the scammers steal US$10 billion annually worldwide.[12] The use of the names of famous and respectable people such as Richard Branson to encourage people to buy fake "investments" is frequent and increasing.[13] Articles published in The Times of Israel newspaper explain the fraud in detail, using the experience of former insiders such as a job-seeker recruited by a fake binary options broker, who was told to "leave [his] conscience at the door".[14][15] Following an investigation by The Times of Israel, Israel's cabinet approved a ban on the sale of binary options in June 2017,[16] and a law banning the products was approved by the Knesset in October 2017.[17][18
What Is the Efficient Market Hypothesis (EMH)?
The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all available information and consistent alpha generation is impossible
According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices.
1
Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing. The only way an investor can obtain higher returns is by purchasing riskier investments.
The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is a hypothesis that states that share prices reflect all available information and consistent alpha generation is impossible
According to the EMH, stocks always trade at their fair value on exchanges, making it impossible for investors to purchase undervalued stocks or sell stocks for inflated prices.
1
Therefore, it should be impossible to outperform the overall market through expert stock selection or market timing. The only way an investor can obtain higher returns is by purchasing riskier investments.
See original
The term market refers to the place where a group of suppliers and demanders come together to engage in transactions involving a particular good or service. From this confrontation arises a price, referred to as the market price.
In theory, there are several types of markets:
When a market is characterized by a significant number of economic agents (sellers and buyers), such that no agent can individually influence the behavior of others and the market price with their decisions, it is a market of pure and perfect competition.
When there is only one seller in a market on one hand and a large number of buyers on the other, it is referred to as a monopoly market. Conversely, if there is only one buyer and several sellers, the market is a monopsony.
When a market is characterized by a small group of sellers and a large number of buyers, it is referred to as an oligopoly (however, if there are only two sellers in the market, we will refer to it as a duopoly). Oligopsony is the situation in which the number of buyers is negligible while that of sellers is significant.
When competing companies in a market sell identical but slightly differentiated goods from one another, it is referred to as a monopolistic competition market.
The market price is determined by the confrontation of supply and demand. However, the market is in equilibrium when the market supply equals the demand expressed in the market.
In theory, there are several types of markets:
When a market is characterized by a significant number of economic agents (sellers and buyers), such that no agent can individually influence the behavior of others and the market price with their decisions, it is a market of pure and perfect competition.
When there is only one seller in a market on one hand and a large number of buyers on the other, it is referred to as a monopoly market. Conversely, if there is only one buyer and several sellers, the market is a monopsony.
When a market is characterized by a small group of sellers and a large number of buyers, it is referred to as an oligopoly (however, if there are only two sellers in the market, we will refer to it as a duopoly). Oligopsony is the situation in which the number of buyers is negligible while that of sellers is significant.
When competing companies in a market sell identical but slightly differentiated goods from one another, it is referred to as a monopolistic competition market.
The market price is determined by the confrontation of supply and demand. However, the market is in equilibrium when the market supply equals the demand expressed in the market.
#BNBChainMeme This paper reviews the development of capital market theories based on the assumption of capital market efficiency, which includes the efficient market hypothesis (EMH), modern portfolio theory (MPT), the capital asset pricing model (CAPM), the implications of MPT in asset allocation decisions, criticisms regarding the market portfolio and the development of the arbitrage pricing theory (APT). An alternative school of thought proposes that investors are irrational and that their trading behaviors are driven by psychological biases such as greed and fear. Prospect theory and the role of behavioral finance that describe investment decisions in imperfect capital markets are presented to contrast the Utopian assumption of perfect market efficiency. The paper concludes with the argument of Hirshleifer (2001) that heuristics are shared by investors and asset prices may not reflect their long-term intrinsic values as indicated by efficient capital market theories.
This paper reviews the development of capital market theories based on the assumption of capital market efficiency, which includes the efficient market hypothesis (EMH), modern portfolio theory (MPT), the capital asset pricing model (CAPM), the implications of MPT in asset allocation decisions, criticisms regarding the market portfolio and the development of the arbitrage pricing theory (APT). An alternative school of thought proposes that investors are irrational and that their trading behaviors are driven by psychological biases such as greed and fear. Prospect theory and the role of behavioral finance that describe investment decisions in imperfect capital markets are presented to contrast the Utopian assumption of perfect market efficiency. The paper concludes with the argument of Hirshleifer (2001) that heuristics are shared by investors and asset prices may not reflect their long-term intrinsic values as indicated by efficient capital market theories.
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