Topic07_efficient_mkt[1]

Topic07_efficient_mkt[1] - Thomas Moeller FINA 30153:...

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Thomas Moeller FINA 30153: Financial Management 1 Topic 7 Market efficiency Objectives 1. Explain the concept of market efficiency 2. Understand the implications for financial manager
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Thomas Moeller FINA 30153: Financial Management 2 Efficient market hypothesis Capital markets are huge computing devices Inputs: Outputs: EMH capital markets compute correct prices on a timely basis Why do we care?
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Thomas Moeller FINA 30153: Financial Management 3 Market efficiency In an efficient capital market, prices (quickly) reflect all relevant information. Therefore, investors – whether individuals, mutual funds, hedge funds, etc. – cannot consistently earn excess profits.
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Thomas Moeller FINA 30153: Financial Management 4 Random walk Observable time series of stock prices looks like a random walk P t+1 - P t = α + ε t α = trend ε t = random noise Past price changes do not predict future price changes: cov( ε t , ε t+1 ) = 0 Stock price Time
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Thomas Moeller FINA 30153: Financial Management 5 AT&T daily chart AT&T 6-month chart
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Thomas Moeller FINA 30153: Financial Management
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Topic07_efficient_mkt[1] - Thomas Moeller FINA 30153:...

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