Glossary: M03 — Market Efficiency
| Term | Definition |
|---|---|
| Abnormal Return | Return in excess of that predicted by an equilibrium model given the level of risk |
| Adaptive Market Hypothesis | Theory that market efficiency varies over time as market participants adapt and evolve |
| Anomaly | A pattern in returns that is inconsistent with the Efficient Market Hypothesis |
| Behavioral Finance | A field that studies how psychological biases affect financial decisions and market prices |
| Calendar Anomaly | Predictable return pattern related to time (e.g., January effect, day-of-week effect) |
| Efficient Market | A market where security prices fully reflect all available information |
| Efficient Market Hypothesis (EMH) | The theory that asset prices reflect all available information at any given time |
| Event Study | A method to assess the impact of specific events on security prices |
| Fundamental Analysis | Analyzing financial statements, industry, and economy to estimate intrinsic value |
| Informationally Efficient | A market where prices adjust rapidly and rationally to new information |
| Intrinsic Value | The true underlying value of an asset based on its fundamentals |
| Market Anomaly | A return pattern that contradicts EMH (e.g., size effect, value effect, momentum) |
| Momentum Effect | The tendency for securities that performed well (poorly) to continue performing well (poorly) |
| Overreaction | Excessive price movement in response to new information, followed by reversal |
| Random Walk | The theory that stock price changes are unpredictable and follow no discernible pattern |
| Semi-Strong Form Efficiency | Prices reflect all publicly available information (public financial data, news) |
| Size Effect | The anomaly that small-cap stocks have historically outperformed large-cap stocks |
| Strong Form Efficiency | Prices reflect all information, including private/insider information |
| Technical Analysis | The use of historical price and volume data to predict future price movements |
| Underreaction | Insufficient price movement in response to new information, with delayed adjustment |
| Value Effect | The anomaly that value stocks (low P/E, low P/B) have historically outperformed growth stocks |
| Weak Form Efficiency | Prices reflect all past market data (prices, volume, trading history) |
Related: M03 Module Page | Equity Formulas