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Abstract

Following the Supreme Court’s 1988 decision in Basic, securities class plaintiffs can invoke the “rebuttable presumption of reliance on public, material misrepresentations regarding securities traded in an efficient market” [the “fraud-on-the-market” doctrine] to prove classwide reliance. Although this requires plaintiffs to prove that the security traded in an informationally efficient market throughout the class period, Basic did not identify what constituted adequate proof of efficiency for reliance purposes.

Market efficiency cannot be presumed without proof because even large publicly traded stocks do not always trade in efficient markets, as documented in the economic literature that has grown significantly since Basic. For instance, during the recent global financial crisis, lack of liquidity limited arbitrage (the mechanism that renders markets efficient) and led to significant price distortions in many asset markets. Yet, lower courts following Basic have frequently granted class certification based on a mechanical review of some factors that are considered intuitive “proxies” of market efficiency (albeit incorrectly, according to recent studies and our own analysis). Such factors have little probative value and their review does not constitute the rigorous analysis demanded by the Supreme Court.

Instead, to invoke fraud-on-the-market, plaintiffs must first establish that the security traded in a weak-form efficient market (absent which a security cannot, as a logical matter, trade in a “semi-strong form” efficient market, the standard required for reliance purposes) using well-accepted tests. Only then do event study results, which are commonly used to demonstrate “cause and effect” (i.e., prove that the security’s price reacted quickly to news – a hallmark of a semi-strong form efficient market), have any merit. Even then, to claim classwide reliance, plaintiffs must prove such cause-and-effect relationship throughout the class period, not simply on selected disclosure dates identified in the complaint as plaintiffs often do.

These issues have policy implications because, once a class is certified, defendants frequently settle to avoid the magnified costs and risks associated with a trial, and the merits of the case (including the proper application of legal presumptions) are rarely examined at a trial.

Details

The Law and Economics of Class Actions
Type: Book
ISBN: 978-1-78350-951-5

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Abstract

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Financial Derivatives: A Blessing or a Curse?
Type: Book
ISBN: 978-1-78973-245-0

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Article
Publication date: 10 May 2011

Marius‐Cristian Frunza, Dominique Guegan and Antonin Lassoudiere

The aim of this paper is to show evidence and to quantify with forensic econometric methods the impact of the missing trader fraud (MTF) on European carbon allowances…

Abstract

Purpose

The aim of this paper is to show evidence and to quantify with forensic econometric methods the impact of the missing trader fraud (MTF) on European carbon allowances markets. This fraud occurred mainly between the end of 2008 and the beginning of 2009. In this paper, the financial mechanisms of the fraud are explored and the impact on the market behaviour, as well as the consequences on its econometric features.

Design/methodology/approach

In a previous work, the first and second authors showed that the European carbon market is strongly influenced by fundamentals factors as oil, energy, gas, coal and equities. Therefore, the authors calibrated arbitrage pricing theory‐like models. These models enabled the impact of each factor on the market to be quantified. In this study, the authors focused more precisely on spot prices quoted on Paris‐based Bluenext market over 2008 and 2009. During this period, a significant drop in performances and robustness of the model and a reduced sensitivity of carbon prices to fundamentals was observed.

Findings

The authors identify the period where the market was driven by MTF movements and were able to measure the value of this fraud. Soon after governments passed a law that cut the possibility of fraud occurrence the performance of the model improved rapidly. The authors estimate the impact of the value added tax extortion on the carbon market at €1.3 billion.

Originality/value

This paper describes the first study that attempts to prove and quantify scientifically the MTF on emission markets.

Details

Journal of Financial Crime, vol. 18 no. 2
Type: Research Article
ISSN: 1359-0790

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Book part
Publication date: 17 February 2020

Simon Grima and Eleftherios I. Thalassinos

Abstract

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Financial Derivatives: A Blessing or a Curse?
Type: Book
ISBN: 978-1-78973-245-0

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Article
Publication date: 1 January 2000

Barry A.K. Rider

There was a time in Britain when even senior representatives of the financial services industry were prepared to be quoted in the press as expressing doubts as to whether…

Abstract

There was a time in Britain when even senior representatives of the financial services industry were prepared to be quoted in the press as expressing doubts as to whether there was anything intrinsically wrong with directors and other corporate insiders taking advantage of their better knowledge about their companies in their own investment dealings. Indeed, some even went so far as to say that this was both proper and natural. True it is that, in Britain or for that much in continental Europe, there are few, even among the groves of academia, that would have advanced the theories justifying insider dealing that Professor Henry Manne so clearly articulated in ‘Insider Trading and the Stock Market’. Nonetheless, in what was then the leading book on the law and practice of the stock market, the authors, a leading Queen's Counsel and an eminent stockbroker, expressed the view in 1972 that a stockbroker who learnt even privileged information should not allow this to operate to the detriment of his client. Having said this, Sir Winston Churchill complained that it was defamatory to assert that advantage had been taken of ‘inside information’ during the so‐called Marconi scandal in 1911, and there are comments in a report to the House of Commons by special commissioners as early as November 1696 roundly criticising promoters of over‐valued stock selling out, in the entrepreneurial fashion eloquently advocated by Professor Manne, on the basis of their privileged knowledge and position. Thus, discussion of the pros and cons of insider dealing, at least in Britain, has tended to be emotional rather than based on economic or even pseudo‐economic analysis of empirical data. Even the surveys that have been conducted on attitudes to the practice would hardly impress a statistician.

Details

Journal of Financial Crime, vol. 7 no. 3
Type: Research Article
ISSN: 1359-0790

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Article
Publication date: 13 May 2019

David Peón, Manel Antelo and Anxo Calvo

The efficient market hypothesis (EMH) states that asset prices in financial markets always reflect all available information about economic fundamentals. The purpose of…

Abstract

Purpose

The efficient market hypothesis (EMH) states that asset prices in financial markets always reflect all available information about economic fundamentals. The purpose of this paper is to provide a guide as to which predictions of the EMH seem to be borne out by empirical evidence.

Design/methodology/approach

Rather than following the classic three groups of tests for the different forms of EMH that are common in the literature, the authors consider how the two alternative definitions of the EMH and the joint hypothesis problem impact on the tests and leave the controversy unsolved. The authors briefly report the antecedents, the main theoretical and empirical contributions and recent literature on each type of tests.

Findings

Eventually, as a summary for each type of tests, the authors provide a critical view on the main sources of acrimony between the alternative schools of thought in understanding asset price formation.

Originality/value

The paper may be seen as an up-to-date introductory review for researchers on the different tests of the EMH performed, and for newcomers to understand the key sources of acrimony between rationalists and behaviorists.

Details

Review of Accounting and Finance, vol. 18 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Content available
Article
Publication date: 9 July 2018

Jim Haslam, Jiao Ji and Hanwen Sun

The purpose of this paper is to summarise and reflect upon key issues at the interface of prices, information and regulation with a focus upon the stock market in context…

Abstract

Purpose

The purpose of this paper is to summarise and reflect upon key issues at the interface of prices, information and regulation with a focus upon the stock market in context. Reflecting upon academic research in the area of efficient markets, and regulatory policy, the concern is to discern issues in terms of policy and support for policy. What does the research imply for policy? Is it possible that the research, perhaps given its rhetoric, can be misinterpreted in relation to policy? The study is also concerned to develop avenues for future research based on these considerations.

Design/methodology/approach

The paper is an analytical and critical review and writing.

Findings

The reading of the research suggests a pragmatic regulatory policy that should be concerned to improve stock market functioning, including with respect to information, as well as the context of which this is part. At the same time, the literature may be read as promoting anti-regulatory policy.

Practical implications

On the one hand, these are consistent with the pragmatic policy referred to above. On the other hand, further research is suggested to explore substantively the rhetoric of the research and its interpretation and to explore understandings of the research and its implications amongst key constituencies in practice.

Originality/value

The concern is to bring key insights from the academic literature together with a view to promoting a pragmatic policy orientation, while cautioning in a critical perspective about how this academic literature and research might be interpreted from a policy perspective.

Details

Journal of Capital Markets Studies, vol. 2 no. 1
Type: Research Article
ISSN: 2514-4774

Keywords

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