Capital market efficiency and survivorship bias

K

keep_running

New member
Joined
Jan 5, 2016
Messages
0
Reaction score
0
How does survivorship bias affects capital market efficiency? Does full capital market efficiency mean that prices incorporate all information into the respective assets?
 
If by “affects capital market efficiency” you mean “affect TESTS of capital market efficiency”, it’s just one of the many biases you have to be aware of in almost any statistical test of a hypothesis.
As one commonly-cited example, let’s assume you’re testing whether default risk is related to asset returns - if you test this relationship over some time frame only the firms that have survived to the end of that time frame, you’ll get a result that is suspect (at least to anyone that knows their statistice.
That’s because the factor you’re testing (default risk) is quite likely not accurately represented by the distribution of only the surviving firms. In this case, including the firms that have exited the sample could potentially give you quite different results.
 
Well the question I am looking at claims that survivorship bias would not have an affect on full capital market efficiency. How is this the case then? Would it be because the capital market efficiency still incorporates all firms (including firms that have died out in the past) into the sample.
 
“Capital market efficiency is desireable, but there are limitations to achieving full market efficiency. Which of the following is least likely to be a limitation to achieving full capital market efficiency?”
1. survivorship bias
2. limits of arbitrage
3. cost of information
 
I don’t see a claim that there would be no effect. It’s clear though that survivorship bias would ‘least likely’ (it’s very important that you note the wording of the question here) be a limitation to full efficiency. Arbitrage clearly contributes to more efficient pricing, cost of information is important as if information isn’t readily available it can’t be priced in.
Does that make sense to you? Come exam day these are the questions that will be important to comprehend. There will be a lot of them, it’s an easy way to lose otherwise safe marks
 
It makes sense in the context of the different choice that are avaliable in the question. But I do not get how capital market efficiency and survivorship bias are related to eachother.
 
You must log in or register to reply here.
Back
Top