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The Information Content of Daily Market Indicators

Published online by Cambridge University Press:  19 October 2009

John T. Emery
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Extract

The theory of efficient capital markets indicates that the prices in an efficient market fully reflect all available information. In much of the literature on efficient markets the term fully reflect is made operational with the assumption that the conditions for market equilibrium can be expressed as expected returns. Fama suggests that most expected return theories can be expressed in the following manner:

(1)

where — adopting Fama's notation — E is the expected value operator; Pjt is the price of security j at time t; Pj,t+1 is its price at t+1; is the one-period percentage return (Pj,t+1|Pjt); φt is a general symbol to represent whatever set of information is assumed to be fully reflected in the price at time t; and the tildes indicate that Pj,t+1 and rj,t+1 are random variables at t.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 8 , Issue 2 , March 1973 , pp. 183 - 190
Copyright
Copyright © School of Business Administration, University of Washington 1973

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References

1 Fama, Eugene F., “Efficient Capital Markets: A Review of Theory and Empirical Work,” Journal of Finance (May 1970), pp. 384–385Google Scholar.

2 Fama, “Efficient Capital Markets,” p. 416.

3 Kendall, Maurice G., “The Analysis of Economic Time-Series, Part I: Prices,” Journal of the Royal Statistical Society, vol. 96, part 1 (1953), pp. 11–25CrossRefGoogle Scholar; Sharpe, William F., “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk,” Journal of Finance, vol. 19 (September 1964), pp. 425–442Google Scholar; Lintner, John, “The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets,” Review of Economics and Statistics, vol. 47 (February 1965), pp. 13–37CrossRefGoogle Scholar; King, Benjamin F., “Market and Industry Factors in Stock Price Behavior,” Journal of Business, vol. 39, special supplement (January 1966), pp. 139–190CrossRefGoogle Scholar.

4 Tryon, Robert C. and Bailey, Daniel E., Cluster Analysis (New York, N.Y.: McGraw Hill, 1970), pp. 71–73Google Scholar.

5 Dhrymes, Phoebus J., Econometrics: Statistical Foundations and Applications (New York, N.Y.: Harper and Row, 1970), p. 53Google Scholar.

6 Ibid., p. 75.

7 Since xt Ln xt is an increasing function, the first day is given the nth weight, the second day the n−lth weight, etc.