Purchase Solution

Market Efficiency

Not what you're looking for?

Ask Custom Question

Please advise if my calculation are correct from the excel file. The word file are the questions that were asked.

---
Event Study and Market Efficiency

Use the market model estimates of residual returns on IBM to determine whether the stock market reacts in an efficient way to earnings announcements. The data that is provided is based on actual closing prices for both IBM and for the NYSE composite index (Market Index). IBM announced its quarterly earnings for the quarter ending 9-94 on 10-21-94 (event day = 0). The actual earnings were $1.18/share. Analysts had forecast quarterly earnings of $0.90/share (the analyst forecast is the average of forecasts by 19 analysts). The returns on IBM and the market index from the 10 days before the earnings announcement through 5 days after the announcement is given in a spreadsheet.

1. Calculate the abnormal return and the cumulative abnormal return for the event days -10 through +5 for IBM. Assume that the return on IBM is generated by the following market model:

2. Plot the cumulative abnormal returns (vertical axis) against event day (horizontal axis).

3. Based on your results in parts 1 and 2, answer the following questions. For each question provide a brief explanation justifying your answer.

Is there any evidence inconsistent with weak form market efficiency? Could you have "made money" on date 0 or date 1 with a trading rule based on the past (date -10 through date 0) pattern of stock returns?

How does the market react to the earnings announcement? Is there evidence inconsistent with semi-strong form market efficiency? Provide 2 plausible explanations for what you observe, one that is consistent and one inconsistent with semi-strong form efficiency.

Is there any evidence that informed agents were trading before the announcement?
---

Attachments
Purchase this Solution
Purchase this Solution
Free BrainMass Quizzes
Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

SWOT

This quiz will test your understanding of the SWOT analysis, including terms, concepts, uses, advantages, and process.

View More Free Quizzes
Related BrainMass Solutions

  • Market inefficiencies

    a) this would be a violation of weak form efficiency b) this would be a violation of all forms of market efficiency c) this would be a violation of strong forms of efficiency d) his would not be a violation of market efficiency e) this would be a

  • This posting addresses market efficieny and the government.

    463363 Market Efficiency and Ethics Can market efficiency evolve on its own without government intervention? Why or why not? What role do ethics play in market efficiency? Market efficiency cannot evolve on its own without government intervention.

  • Finance Tutorial: Efficient Markets and Informational Asymmetry

    Carefully explain what is meant by the term efficient market. Are there different levels of market efficiency? What are those levels?

  • Efficient Market Hypothesis-strong, semistrong, weak

    TRUE Semi -Strong form market efficiency means that current security prices reflect all public information, including market and non-market information.

  • Economics

    Efficiency affects the success and failure of market. There is a great significance of efficiency in competitive markets because it helps in performing market activities.

  • Financial Regulation in the US

    567984 Financial Regulation in the US Discuss various measures of capital market efficiency and how efficient capital markets contribute to the efficiency in the market for goods and services (including productive capital).

  • Three Forms of Market Efficiency, Preferred Stock

    142578 Three Forms of Market Efficiency and Preferred Stock Define the three forms of market efficiency. What is preferred stock? Do you think it's more like debt or equity? Please provide one reason for your answer.

  • ATC and minimum efficiency

    We also have that at the equilibrium, the market price is equal to the MC of firms. When this happens, we have allocative efficiency in the market.

  • Efficient Financial Markets

    The other type of the market efficiency is known as semi-strong structure which has events that are being reflected in the business environment (Market Efficiency, n.d).

  • Market Efficiency Theory

    551572 Market Efficiency Theory The theory of market efficiency is based on the premise that a market is considered efficient when stock prices are an actual reflection of information known about a company.

View More Related Solutions