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Title :A case study on the violations of The Efficient Market Hypothesis
Creator :Χριστογιαννοπούλου, Μαρία-Άννα
Contributor :Κόρδας, Γρηγόρης (Επιβλέπων καθηγητής)
Athens University of Economics and Business, Department of Economics (Degree granting institution)
Type :Text
Extent :72σ.
Language :en
Abstract :It is without doubt that the function of financial markets has a great impact on the modern way of life. In the recent years financial markets have risen continuously and this has caused investor’s and researcher’s interest. Investors try to achieve the best investment of their income in addition to make extra money for the future with the minimum risk. A crucial factor for that is their ability to predict future stock moves. A very common subject of economical researchers is the existence and the acceptance of the basic financial theories in this modern financial system. Many financial theories support the Efficient Market Hypothesis, according to which investors cannot acquire abnormal returns without undertaking the corresponding risk. This means in fact that investors cannot “win” the market. On the other hand, there are several studies which have shown that some “events” might have great influence on stock prices and also that investors can become able to earn abnormal returns by using the right strategy.The present essay is referred to the frame of this general controversy of the Market Efficient Hypothesis. We present a real case in which Andrew Redleaf gain money by using public information from Securities and Exchange Commission (SEC). He was informed that some companies backdate their stock options and his strategy was to buy bonds from those companies, denounce them at SEC for backdating and then demand immediate payment of his bond at par. The remainder of this essay proceeds as follows: The first chapter reviews The Efficient Market Hypothesis and some issues that come in contradiction with the above theory. The second chapter analyzes the action of the Securities and Exchange Commission and the kind of information SEC decides to make public.The third chapter examines the CEOs motive given by shareholders. (Using stock options)The fourth chapter presents the notion of backdating stock options and the reason why this is a common practice by CEOs. The fifth chapter reports 5 essays which discovered and approved that backdating exists. The sixth chapter, based on real data by SEC, indicates several well known companies which caught backdating stock options.The seventh chapter explains how Andrew Redleaf managed to gain abnormal returns using public information. We explain that this arbitrage opportunity violates The Market Efficient Hypothesis.In conclusion the eighth chapter indicates that the market efficient hypothesis generally exists for average investors but there are many reasons to believe that big investors have many opportunities of “free lunch”, something that violates the Market Efficient Hypothesis.
Subject :Financial market
The Efficient Market Hypothesis
Date :31-01-2010
Licence :

File: xristogiannopoulou_2010.pdf

Type: application/pdf