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The effects of new information on Canadian equity prices Watson, Patrick William

Abstract

This paper investigates the efficiency of the Canadian securities market; specifically, the reaction of security prices to a particular piece of new information was analyzed, the new information of concern being the information contained in the quarterly mutual fund trading reports published in The Financial Post. As such, the analysis constitutes a test of the semi-strong form of the efficient markets hypothesis. The prime concern of the analysis was the extent and duration of the price reaction to this new information. Residual analysis, first implemented by Fama, Fisher, Jensen and Roll in a paper entitled "The Adjustment of Stock Prices to New Information" (2), was conducted on the return data to eliminate differing economic conditions during the time horizon of the study. By eliminating the portion of return associated with varying economic conditions, the effects of the new information are impounded in the residual returns. The analysis of the residual returns investigated the averages of these residual returns on the date the specific information became publicly available and also the trend of the residual returns over time. In addition, the residual returns were investigated as a function of the size of mutual funds net trading activity in that security. In only one case did it appear that the Canadian security markets may be inefficient. However, the general conclusion is that the Canadian security markets are efficient with respect to the new information analyzed by this study.

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