Determine if stock prices respond efficiently to information. What did Fama find?

Question - (i) Explain the momentum effect.

Answer - The original empirical work supports the randomness notions of stock prices that support the view of supported stock market memory.

The more work that is recently Lo & MacKinlay's (1999) serion on the correlation between the existence of zero compared to "too much" and successful direction is similar to the hypothesis that has the stock prices on behave of random walks. The momentum, for example, the price tendency will the face a similar direction with increased short-run on regard to stock price or then the psychologist and economist in the behaviour influence field of the finance in that regard the broader finance on the perspective of social science that includes the sociology and psychology that is like finding the momentum short-run and in the psychological consistency of mechanism feedback. For instance, Shiller (2000) offers a well-raised description of the United States stock market during the late 1990s result of psychological contagion results a d that may offer irrational exuberance.

As finance behaviour on finance become many branches in the finance market study and also the momentum the randomness of opposed, seems reasonable regarding a lot of the investors. But many factors indicate prevention on the empirical interpreting of results and also reported on the indication above on the inefficient market. The first vital difference on the statistical significance or importance of economics. The dependency on statistics ofer rise to extreme momentum and the small investor's permission on the returns. Additional offer momentum of investors in the returns excess realization. This is particularly because most large transactions attempt to exploit whatever is existing in the momentum. Second, regarding behavioural hypotheses that sound plausible enough, various evidence indicates that the effects occur in a manner systematically prescribed in the stock market. The main factor is the serial correlation pattern of the consistency in time. The strategy of momentum refers to stock buying and the serial correlation on positive appeal in producing positive returns for a long period (1990). However, negative, on the other hand, offers negative results in (2000) of the returns.

(ii) Fama (1998) surveys empirical "event studies" that seek to determine if stock prices respond efficiently to information. What did Fama find?

Answer - Revolutions the spawn counterrevolutions also the market efficient hypothesis regarding no exception finance in finance. The dominance of the revolution on intellectual dominance on the related efficient-market was then more challenged through economists stress behaviour and psychological on in the elements of determination of stock-price and alsoconometricians argue stock returns that are to a considerable extent also predictable. The survey examines the attacks on the hypothesis of an efficient market and the relationship between efficiency and predictability. In conclusion, the existing stock markets, which have been seen as more efficient and less predictable than most recent papers on academics, would not believe.

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Explain the test by Litzenberger and Ramaswamy

Explain the momentum effect

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