Define and discuss the efficient markets hypothesis

Reference no: EM133454131

Questions:

1. (a) Define and discuss the Efficient Markets Hypothesis (EMH), in- cluding criticisms and limitations. (b) Explain how you might test the EMH using autocorrelations. What problems might arise in implementing these tests? (c) Briefly assess the empirical evidence for or against the EMH. 2. Define variance ratio tests, and discuss their use. 3. (a) Discuss L0 and MacKinlay's (Journal of Econometrics, 1990) model of non-trading (nonsynchronous trading). (b) Define the bid-ask spread for stock prices. Outline Roll's (Jour- nal of Finance, 1984) model of the consequences for stock price changes of a fixed bid-ask spread. 4. Discuss how to conduct an event study analysis of financial events (e.g., stock splits). What issues might arise and how might they be dealt with? 5. (a) Compare and contrast simple models of fundamentals versus bubbles to explain stock prices. (b) Discuss econometric tests to detect bubble behaviour. (c) Explain how you might use predictive regressions to assess long- horizon predictability of returns. What problems might arise in interpreting these predictive regressions? 6. (a) What stylised features of financial market data could be mod- elled by ARCH or GARCH models? Outline the key properties of the GARCH(1,1) model. How might it be modified to allow for asymmetric volatility (e.g., leverage effects)? (b) Define and motivate the realized volatility of high-frequency re- turns. What alternative measures of volatilty might be used in the absence of data on high-frequency returns?

Reference no: EM133454131

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