Market Efficiency - MarketEfficiency Summary Efficient...

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Market Efficiency Professor David McLean Alberta School of Business
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Summary Efficient Market Hypothesis (EMH) Defining an efficient market Why should markets be efficient? If markets are efficient, then are stock returns predictable? Some Empirical Evidence – what do the data tell us ? 2
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Rocket Ships and Financial Markets 3
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January 28, 1986, 11:39am § 11:47am: ‘‘Space Shuttle Explodes’’ § 12:17pm: ‘‘Lockheed Has No Immediate Comment’’ § 12:52pm: ‘‘Rockwell Intl Has No Comment’’ The Challenger Tragedy 4
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The Investigation Reagan Establishes Presidential Commission To Investigate 5
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Six Months Later We Learn  What Went Wrong Rogers Commission Report Published June 9, 1986 § Concluded that  Morton Thiokol was at fault O-Ring 6
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The Market Almost  Immediately The Stock Market Reflected This Information Within Minutes 7
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Rocket Ships and Efficient  Markets 8
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CNBC and the Stock Market Do you watch business news that is on when the stock market is open? How quickly do you think the information from TV business news gets into prices? 9
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The News and Stock Markets CNCB News Announcements 10
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Merger News and the Stock Market When one firm attempts to buy another the acquirer usually offers a premium for the target’s shares So if the stock price is $20, the acquiring firm might offer to buy all of the shares at $25 or $30 per share How long do you think it takes this kind of information to get into prices? 11
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Cumulative Abnormal Returns before  Takeover Attempts: Target Companies 12
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Defining Market Efficiency A market is efficient if prices reflect all relevant information In an efficient market an asset’s price reflects its actual value Put differently, if markets are efficient, then prices are right In an efficient market, there are no alphas 13
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Making an Efficient Market §
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