If markets are efficient, when new information about a stock becomes available, the price will:

2.3.3. Trading and Information

Informational efficiency means that information must be properly incorporated into prices. Under assumptions of rationality, when all traders have the same information, prices should move more or less automatically, with very little trading (Milgrom and Stokey, 1982; Sebenius and Geanakoplos, 1983). But of course that's not true—people don't have the same information, and even if they did, real people are likely to take different views on what the information means. The empirical fact that there is so much trading supports this idea (Shiller, 1981). Grossman and Stiglitz (1980) developed an equilibrium model in which traders have different information that shows that in this situation, trading and price movements are informative (see also Grossman, 1989). If I know that you are rational, and I know that you have different information than I have, when I see you trade and the price rises I can infer the importance of your information and thus I should change my own valuation.

Intuitively the problem with this view is that even small deviations from rationality and perfect information can lead to incorrect prices and instabilities in the price process. Suppose, for example, that you and I both overestimate how much information the other has. Then when I see you trade I change my valuation too much. When I see you buy, I also buy, but I buy more than I should. To make this slightly more quantitative, let the initial price be p0 and suppose that after Agent A observes new fundamental information the price rises by f, which might or might not be the correct fundamental level. After Agent A trades, the new price becomes p1 = p0+ f. Agent B sees the price rise by f, and assuming that Agent A has more information than he really does, he buys and causes the price to rise to p2 = p0 + af. Then B sees the price rise more than f, so he buys, driving it to p3 = p0 + a2f, and so on. This process is clearly unstable if a > 1. The agents either need to know the value of a exactly or they need to be able to adapt a based on information that is not contained in the price. It is difficult to understand how they can do this since by definition if they are not rational, not only do they not have full information, they do not know how much information they have, and they thus cannot know a priori the proper value of a. Under deviations from rationality, deviations from fundamentals are inevitable. For a beautiful model where copycats lead to such instabilities, see P. Curty and M. Marsili (2006).

In its extreme version, this is just the kind of scenario that occurs during a bubble (see Bouchaud and Cont, 1998, for an explicit model). Any reasonable investor who lived through the millennium technology bubble experienced this problem. Even though high prices seemed difficult to rationalize based on values, prices kept going up. This led many sanguine investors to lose confidence in their own valuations and to hang onto their shares much longer than they thought was reasonable. If they didn't do this they experienced losses as measured relative to their peers. Under this view, bubbles stem from the problem of not knowing how much information price movements really contain and the feedback effects that occur when most people think they contain more information than they really do. This point of view differs from that in the standard literature on rational bubbles. As we argue here, though not entirely different, there are important contrasts between this view and the standard rational expectations/noise trader models.

3 The Empirical Literature on Frontier Markets and Informational Efficiency

The striking feature of the empirical literature on informational efficiency and frontier markets is the paucity of material available. Very little research—whether on a European or other basis—has been carried out into frontier markets and specifically the efficiency of how these markets process information; an example of such an early study, albeit of an emerging market, namely Russia, can be found in Kratz (1999).

3.1 Introduction: Defining Market Efficiency

The efficient market hypothesis (EMH) is getting new consideration in recent studies of financial markets in part due to the need for a baseline price model and in part due to the practical aspects of trading and investing.

Informational efficiency: Market efficiency has varying degrees: strong, semistrong, and weak. Stock prices in a perfectly efficient market reflect all available information. These differing levels, however, suggest that the responsiveness of stock prices to relevant information may vary. The EMH states that a market cannot be outperformed because all available information is already built into all stock prices. Practitioners and scholars alike have a wide range of viewpoints as to how efficient the market actually is.

Our study is concerned only with aspects of the informational efficiency of the capital markets. Some of the significant contributions to the “market efficiency” concept, asserting that EMH is true, are summarized here:

Bachelier (1900): In his PhD thesis:“past, present and even discounted future events are reflected in market price, but often show no apparent relation to price changes.”

Samuelson (1973): In the article, “Proof that properly anticipated prices vibrate randomly,” stated: “…competitive prices must display price changes…that perform a random walk with no predictable bias.” Therefore, price changes must not be predictable if they are properly anticipated.

Fama et al. (1969): First definition of “efficient market is a market which adjust rapidly to new information.”

Fama (1970): “A market in which prices always ‘fully reflect’ available information is called ‘efficient’.”

Rubinstein (1975) and Latham (1985): They have extended the definition of market efficiency. The market is said to be efficient with regard to an informational event if the information causes no portfolio changes.

Jensen (1978): He states that prices reflect information up to the point where the marginal benefits of acting on the information (the expected profits to be made) do not exceed the marginal costs of collecting it.

Malkiel (1992): He offered the following definition: “A capital market is said to be efficient if it fully and correctly reflects all relevant information in determining security prices. Formally, the market is said to be efficient with respect to some information set…if security price would be unaffected by revealing that information to all participants. Moreover, efficiency with respect to an informational set…implies that it is impossible to make economic profits by trading on the basis of (that informational set).”

2.1 Market Efficiency and Fund Performance

Investment performance is closely related to the issue of the informational efficiency of markets, as summarized by Fama (1970, 1991). I offer an updated interpretation of efficiency using the SDF approach. As emphasized by Fama, any analysis of market efficiency involves a “joint hypothesis”. There must be an hypothesis about the equilibrium model and also an hypothesis about the informational efficiency of the markets. These can be described using (1). In this interpretation, Zt is any subset of the full information set, call it Zt∗ , that is conditioned on by agents in the model. If Xt+1 is the payoff of an asset and Pt is its market price, then Rt+1 = Xt+1/Pt and the equilibrium model says that Pt=E{mt+1Xt+1|Zt∗}. The equilibrium price is the mathematical conditional expectation of the payoff given Zt∗, “discounted” using mt+1. In the language of Fama (1970), this says that the price “fully reflects” Zt∗.

The joint hypotheses in tests of asset pricing and market efficiency include an hypothesis about the model and an hypothesis about the information. The hypothesis about the model of market equilibrium amounts to a specification for the stochastic discount factor, mt+1. For example, the Capital Asset Pricing Model of Sharpe (1964) implies that mt+1 is a linear function of the market portfolio return (e.g. Dybvig and Ingersoll, 1982), while multi-beta asset pricing models imply that mt+1 is a linear function of the multiple risk factors (Ferson, 1995).

Fama describes increasingly fine information sets in connection with market efficiency. Weak-form efficiency uses the information in past stock prices. Semi-strong form efficiency uses variables that are obviously publicly available, and strong form uses anything else. The different information sets described by Fama (1970) amount to different assumptions about what information is contained in Zt∗ and what is therefore legitimately used as empirical instruments in Zt. For example, weak-form efficiency says that past stock prices may be used in Zt, semi-strong includes public information and strong form includes all information.

If the SDF prices the primitive assets, Rt+1, then (2) implies αpt will be zero for a portfolio of the primitive assets using only information Zt contained in Zt∗ at time t. The portfolio returns is Rp,t+1 = x(Zt)'Rt+1 and αpt = E{[E(mt+1x(Zt)'Rt+1|Z*t)] − 1|Zt} = E{x(Zt)'[E(mt+1Rt+1|Zt)] − 1|Zt} = E{x(Zt)'1 − 1|Zt} = 0, since the portfolio weights sum to 1.0. Thus, informational efficiency says that you cannot get an alpha different from zero by trading assets using any information Zt that is fully reflected in market prices. Since alpha depends on the model through mt+1, there is always a joint hypothesis at play. Indeed, any evidence in the literature on market efficiency can be described in terms of the joint hypothesis; that is, the choice of mt+1 and the choice of the information Zt.

If we find an investment strategy that has a positive alpha in a model that controls for public information, this rejects a version of the joint hypothesis with semi-strong form efficiency. If we do not question the model for mt+1 then we may interpret such evidence as a rejection of the informational efficiency part of the joint hypothesis. Alternatively, the model for mt+1 could be wrong.

A complication arises in applying market efficiency concepts to managed fund performance. The complication relates to whether the portfolio manager or other investors are using the information in question. Managers use their information to form the fund’s portfolio strategy. Evidence about the performance of a fund therefore relates to the information used by the manager. For example, a manager may use private information to deliver alpha, which speaks to strong form efficiency. Grossman and Stiglitz (1980) emphasize that no one would expend resources to gather information if it did not pay to trade on it. So, it would be hard to imagine an efficient market if no one had investment ability. The question of how fund managers are paid for their investment ability has to do with the efficiency of the labor market for fund managers. The value added for investors, on the other hand, is traditionally the central issue for studies of the efficiency of financial markets. Much of the evidence in the literature on fund performance is described in terms of portfolio strategies that use information to combine mutual funds. For example, if funds’ alphas persist over time and investors can use the information in the past returns of the funds to form strategies that deliver abnormal performance, this speaks to weak form efficiency. If those strategies rely on additional public information, beyond past prices and returns, it speaks to semi-strong form efficiency. The relation between the efficiency of the labor market for fund managers and the informational efficiency of financial markets has not yet, to my knowledge, been fully addressed in our research.

Behavior Intervention Rating Scale

Von Brock and Elliott (1987) used the Behavior Intervention Rating Scale (BIRS) to evaluate the influence of effectiveness information and problem severity on treatment acceptability. Case descriptions were developed, which described the severity of the problem behavior displayed by a child as either mild or severe. Treatment descriptions of a token economy, a response cost procedure, and a time-out procedure were developed along with information describing varying degrees of effectiveness for each of the treatments. The case descriptions and treatments with varying effectiveness information were used by 216 teachers to rate the acceptability of the treatments. The results concluded that both the severe problem behavior and increased effectiveness information influenced the acceptability of the treatments. The time-out procedure was found to be significantly less acceptable than the other two treatments.

Manipulation of the level of treatment effectiveness information on treatment acceptability was also examined by Clark and Elliott (1988). They distributed a case vignette, a treatment acceptability measure, and a general knowledge of techniques questionnaire to 133 elementary school teachers from Nebraska and Louisiana. The case vignettes manipulated two potential treatments: modeling-coaching (a form of) versus overcorrection method (a form of) and two levels of outcome effectiveness (weak vs strong therapeutic effects). Treatment acceptability was rated using the BIRS. Findings indicated a statistically significant preference for the modeling-coaching treatment when compared to the overcorrection treatment and statistically significant positive influence on acceptability by strong therapeutic outcome effects. They also determined a positive correlation between knowledge of techniques and acceptability ratings.

Miller, DuPaul, and Lutz (2002) evaluated the acceptability of three psychosocial treatments for childhood depression using the BIRS. A total of 228 members of the National Association of School Psychologists rated cognitive restructuring and self-control therapy as more acceptable than social skills training.

Olive and Liu (2005) compared posttreatment acceptability ratings on the BIRS between teachers and parents. Following successful implementation of a treatment for challenging behavior, parents rated the treatments more acceptable than teachers. In addition, the acceptability of the treatments increased in relation to the overall behavior change resulting from the treatment.

Pisecco, Huzinec, and Curtis (2001) evaluated the influence of characteristics of the child described in a case vignette with teacher acceptability ratings of behavioral and medication treatments. They presented 159 elementary school teachers with case vignettes which varied the specific subtype of ADHD and the gender of the child. Then the teachers completed the BIRS for a description of a daily report card procedure, a response cost technique, a classroom lottery, and medication. Their results concluded that the daily report card was the most acceptable treatment and they also found that medication was more acceptable as a treatment for boys than for girls.

In a similar study, Curtis, Pisecco, Hamilton, and Moore (2006) used the BIRS to examine cross-cultural differences in acceptability ratings of some classroom treatments for students diagnosed with ADHD. Teachers from the United States and New Zealand rated the acceptability of treatments described within vignettes which included a daily report card procedure, a response cost technique, a classroom lottery, and medication. The results revealed cultural differences in acceptability ratings with teacher from the United States providing higher acceptability ratings than teacher from New Zealand. In addition, an interaction was found to occur with the gender and nationality of the student described in the vignettes and acceptability ratings which was similar to findings by Pisecco et al. (2001).

Some other instances of the BIRS being used to rate acceptability of various treatments are cueing procedures for children with ADHD (Posavac, Sheridan, & Posavac, 1999) and mnemonic instruction for students with learning disabilities (Scruggs & Mastropieri, 1989).

21.1.1 Australian Regulation

The Australian share market is regarded as being typical of that of an advanced country. It has a reasonable degree of informational efficiency and is quite well regulated. For example, Section 205G of (Australian) Corporations Act (2001) requires every director of a listed company to notify the Australian Stock Exchange (ASX) about holdings and changes in relevant interests in securities in their own firms. The notification must be within 5 business days of the change in interest. In order to satisfy this requirement, directors are obliged to complete an appendix, which is then recorded by the ASX. This reveals the director who trades, the amount traded, the price at which they bought or sold, and whether or not it was an on or off market trade. This information is then disseminated to the general public on the day the director lodges the appendix. In an examination by the ASX, its 2008 report revealed that over 13% of directors did not conform to the reporting requirement.

In March 2008, the ASX issued a report to all companies reminding them of their obligations and stating that, from July 1, 2008, they will be heavily scrutinizing directors' interest notices that are lodged late or incomplete. Breaches of Section 205G may result in criminal prosecutions by the Australian Securities and Investment Commission (ASIC). When ASIC identifies a breach, the director is sent a letter asking for an explanation. This explanation may not necessarily avoid prosecution being taken. However, the explanation will be taken into account when the ASIC is deciding criminal prosecution.

In September 2008, the practice of short selling became the focus of the Australian regulatory authorities. Company directors selling stocks in a bear market were not regarded as the major problem. After all, they were only selling shares that they already owned. Nevertheless, the position put in this chapter is that their decision to sell stock in their own company may have become a signal for those market players who wished to profit from a fall in the share price. The moral justification of short selling was again brought into the spotlight. Can we legally sell something that we do not own? Did selling directors contribute either innocently or deliberately to others short selling profits being generated on the basis of bad news? Did short selling exacerbate a fall in the Australian stock market? The regulatory authorities felt the latter activity did, and bans on uncovered and covered short selling were introduced on September 21, 2008. The ban on covered short selling was lifted on May 25, 2009, primarily on the basis of a partial recovery in the Australian stock market, but reporting requirements remained.

Estimating the Distribution of Health Changes Due to the Intervention

The next step in DCEA is to estimate the net impact of one or more interventions on the baseline distribution of health within the general population. This requires not only ‘effectiveness’ information on the direct health benefits of the health intervention on individuals receiving the intervention, but also information on the indirect health impacts of the intervention – in particular, the health opportunity costs due to displaced expenditure within the health sector budget – on both recipients and nonrecipients of the intervention. There are a number of factors that may vary by relevant population subgroup characteristics, which must be incorporated into the model to estimate correctly the impact of a health intervention on the population health distribution, including:

Prevalence and incidence of the health condition, which will also help to analyze the differing maximum potential impact that the intervention could have on each population subgroup.

Uptake of the intervention, which for more complex interventions may include differential uptake by subgroup at multiple stages of the patient pathway.

Effectiveness of the intervention.

Mortality and morbidity due to condition and comorbidities.

Opportunity cost.

Under the assumption of a fixed overall health budget, any additional costs associated with the intervention will result in some displacement of activity. The distribution of the health opportunity costs due to this displacement on both recipients and nonrecipients of the intervention in the population needs to be characterized by subgroup to give the overall distribution of health losses due to the intervention. A simple and convenient assumption is that the distribution is neutral – i.e., all subgroups share equally in the health opportunity cost of displaced health sector activity. However, this assumption may not be accurate, and ideally, one would want evidence on the likely distribution of health opportunity cost.

Once the distribution of health gains and health opportunity costs of an intervention for each population subgroup have been estimated, these distributions can be combined to produce a distribution of net health changes by subgroup and applied to the baseline health distribution to give an estimate of the impact of the intervention on the overall health distribution.

The Rationale for Adopting Rule 415

Adoption of Form S-3 and Rule 415 by the SEC was a practical outgrowth of the mounting evidence that securities markets are informationally efficient. Formally, the capital markets efficiency hypothesis states that securities prices reflect all available information (public and private). An implication of informational efficiency is that information contained in already published (financial and nonfinancial) statements becomes stale and of no use to investors. This is so because investors react promptly to any new piece of information. Hence, there is no more useful information to be extracted from past news releases or financial statements that could affect the current price of a security.

This view of capital markets leads to two important implications. First, the reproduction of recent filings under the 1934 Act is redundant; past information is not relevant for current prices. Second, the underwriter’s price discovery skills are not unique vis-à-vis those of other investors. If information is uniformly available to all market participants, the underwriter should not possess any superior information advantage in pricing the firm’s securities. As new information becomes available, investors revise their expectations and adjust the prices of securities accordingly. Notwithstanding the views in favor of the efficient capital markets hypothesis, the SEC adopted the more conservative approach and extended the privilege of shelf registration to large seasoned issuers that also met criteria for broad stock ownership.

Further National Institute for Health and Clinical Excellence Reflections

This part of the article draws on the authors' qualitative empirical work looking at the challenges for NICE in making full use of economic evaluations. Although issues of accessibility, broadly speaking, are not acute at the national level in the UK, organizations like NICE still have some important issues to address in this field. The NICE Appraisals Committee is in the highly unusual situation of having, for every topic they consider, an economic analysis undertaken specifically for their purposes. Thus, they avoid the frequently cited problems encountered by those working at a local level in the NHS of not being able to access cost-effectiveness (CE) information in a timely manner.

In terms of the challenge of interpreting CEAs, the qualitative study uncovered poor levels of understanding of CE information. The extent to which this is a serious barrier depends, to some extent, on the role NICE Committee members are expected to play and the overall approach to decision making being adopted. If all Committee members have a vote on the policy decision then they all need to understand all relevant information presented, including the CEA. A failing on the part of analysts that was revealed from the authors' research concerned the presentational style of CE studies. The highly technical nature of the CE studies being undertaken for NICE, and their presentational style, make for difficulties in understanding for the noneconomist. The need for improvements in the presentation of CE studies was a strong message from the authors’ work.

A commonly cited acceptability concern with the CEAs is that they fail explicitly to consider the opportunity costs of the decisions being made. In the authors’ research this was raised by a number of committee members including both health economists and health care managers. The CEA at NICE typically presents the problem in terms of a one-off decision concerning the coverage of a given health technology, commonly a new drug. No explicit consideration is therefore given to the sacrifice that would be required in order for the additional resources to be made available (assuming that the incremental cost is positive). An attempt to negate this problem involves use of a CE threshold, and defining technologies that have ICERs that fall below the threshold as cost-effective uses of NHS resources (regardless of their true opportunity cost). This issue has been highlighted by other commentators. However, although the necessity of using a CE threshold was acknowledged by most of the authors’ research subjects, it was also viewed as problematic because the basis for the threshold value or range is very unclear.

In summary, the data from the authors' qualitative work with NICE suggest that for analyses to be viewed as acceptable, it is necessary that they provide information: (1) that end-users see as relevant (i.e., providing data on parameters that are likely to influence the decision of the policy maker), (2) that is appropriate to the decisions being faced, taking into account relevant contextual factors (e.g., budgetary arrangements commonly seen in the NHS), and (3) that can inform implementation of decisions in a complex decision making environment.

1 Introduction

This study investigates stock price behavior of the Southeast Asian (SEA) frontier markets of Vietnam, Laos, and Cambodia. To do so, we are testing stock market efficiency of these markets, and especially the extent to which stock prices follow a random walk. The contribution of this paper is therefore twofold. First, from an academic perspective, it complements prior evidence on the issue of informational efficiency for these markets using out-of-sample data, especially covering the period following the 2007–09 global financial crisis. Second, from a professional investment viewpoint, assessing the level of stock market efficiency of these countries allows better understanding of their economies and of the soundness of their financial systems, as in the presence of market efficiency stock market prices should accurately reflect companies’ actual performance. Furthermore, the understanding of how securities markets perform allows relevant governments to adopt appropriate policies to stimulate growth and capital investments, leading to the improvement of the country’s economic environment.

In brief, using alternative testing procedures, our results suggest that all three markets under examination are currently weak-form inefficient. Furthermore, the degree of informational inefficiency (or not) varies on the basis of the methodology adopted and the frequency of the examined stock return series. For example, although all markets appear to be influenced by long memory dynamics and symmetric volatility, testing for randomness in the return series indicate a marginal degree of efficiency in the case of the newer stock markets of Cambodia and Laos.

The rest of the chapter is structured as follows. Section 2 presents a review of key prior literature on market efficiency and empirical evidence from emerging and frontier markets. Data and methodology are provided in Section 3; Section 4 reports the findings of the empirical tests. Finally, conclusions are drawn in Section 5.