BWFN3013_Topic 6_Stock Prices Behavior Market Efficiency.ppt

BWFN3013_Topic 6_Stock Prices Behavior Market Efficiency.ppt

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Topic 6 STOCK PRICES BEHAVIOR AND MARKET EFFICIENCY
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Learning Objectives Discuss the Foundation of Market Efficiency and Types of Market Efficiency Discuss the Implication of Market Efficiency Discuss the stock market anomalies with examples
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Foundation of Market Efficiency Random Walk : The theory that stock price movements are unpredictable, so there is no way to know where prices are headed Studies of stock price movements indicate that they do not move in neat patterns. This random pattern is a natural outcome of markets that are highly efficient and respond quickly to changes in material information.
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Foundation of Market Efficiency (cont.) Efficient Market : a market in which securities reflect all possible information quickly and accurately To have an efficient market, you must have: Many knowledgeable investors actively analyzing and trading stocks Information is widely available to all investors Events, such as labor strikes or accidents, tend to happen randomly Investors react quickly and accurately to new information
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Figure 1.1 Wal-Mart Quarterly Revenues
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Figure 1.2 Wal-mart’s Stock Price
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Efficient Market Hypothesis Efficient Market Hypothesis (EMH) : information is reflected in prices—not only the type and source of information, but also the quality and speed with which it is reflected in prices. The more information that is incorporated into prices, the more efficient the market becomes. Levels of the EMH Weak Form of EMH Semi-strong Form of EMH Strong Form of EMH
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Weak Form of EMH Current prices fully reflect all security-market information, including the historical sequence of prices, rates of return, trading volume data, and other market-generated information. This implies that past rates of return and other market data should have no relationship with future rates of return Past data on stock prices are of no use in predicting future stock price changes. Everything is random. Two approaches to test whether market is in weak form of EMH: (A) Tests of “statistical memory” in security prices and returns (B) Tests of trading rules (buy and hold policy)
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A . Statistical tests of independence between rates of return Auto-correlation tests Mostly support the weak-form EMH and indicate that price changes are random Some studies using more securities and more complicated tests cast some doubt Runs tests Indicate randomness in prices B. Comparison of trading rules to a buy-and-hold policy Some filter rules seem yield above-average profits with small filters, but only before taking into account the substantial transactions costs involved Trading rule results have been mixed, and most have not been able to beat a buy-and-hold Weak Form of EMH (cont.)
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Weak Form of EMH (cont.)
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  • Fall '14
  • missbooi

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