View the article online at http://citywire.co.uk/wealth-manager/article/a761105
Can you beat the market without an information advantage?
by Robert St George on Jul 14, 2014 at 11:00
Investors need an information advantage in order to beat the market, according to a study by a leading academic.
Meziane Lasfer, a professor of finance at Cass Business School, looked at the share price movements of AstraZeneca and Pfizer before, during and after their very public takeover negotiations. He focused on the stocks’ daily excess returns, which he calculated as the returns from each firm minus the market return from the FTSE 100 for AstraZeneca and the S&P 500 for Pfizer.
Lasfer, who also served as an external consultant at the Financial Services Authority from 2007-09, identified three distinct phases in these returns.
The first is the period from May to November 2013, when there was no hint of a deal. Lasfer found that through this time the direction of both share prices was ‘relatively random’. AstraZeneca produced a daily excess return of 0.01% and Pfizer of 0.04% during these months, with a positive correlation between the two stocks.
The second phase runs from November to April 2014, which spans the first contact between AstraZeneca and Pfizer – which was not disclosed to the market at the time.
‘This is the most interesting period,’ Lasfer said. First, the stocks were negatively correlated in these months – for Lasfer this represents ‘an ideal dream of fund managers’.
Pfizer’s daily excess returns were minus 0.07% through the period, while AstraZeneca’s were positive at 0.22%. ‘This indicates that an informed investor could short Pfizer and go long on AstraZeneca and generate excess returns of plus 31.2%,’ Lasfer said.
The third period is the single day of 28 April, when AstraZeneca and Pfizer made their announcements to the market. Both share prices climbed, with AstraZeneca’s spiking 14%, as textbooks would suggest given the mooted synergies and premium offer.
‘If an informed investor knew about – or predicted correctly – this takeover in November 2013, the total excess returns she would have accumulated would be a stunning 48.28%,’ Lasfer said.
‘What can this case teach us?’ he asked in conclusion.
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