COMMERCE 2FA3 Lecture Notes - Lecture 7: Market Liquidity, Regulatory Capture, Foreign Exchange Market
10 Apr 2017
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Arbitrage: the act of attempting to profit from an inconsistency in relative prices (definition). Very simple for arbitrageurs to take advantage of situation when currency prices are out of line. But most arbitrage is not nearly as simple as in case of currencies. So maybe prices aren"t always equal to values . If value and price were always the same, the way to figure out value would be to look at price. Solution to paradox: someone may earn more, but may also pay more money to do the analysis. Operational definition of market efficiency: financial markets are efficient if no one can consistently earn excess returns after all costs are factored in. Testing market efficiency (aim to get excess returns): 2 methods. 2. look at money managers (especially mutual fund and pension fund managers) 1. weak-form: believers disagree that money can be made by focusing on past stock prices.
