Topic 8 EMH - Topic8: EfficientMarketHypothesis FIN4504...

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Topic 8: Efficient Market Hypothesis FIN 4504 Aaron Gubin
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2 Introduction Efficient Market Hypothesis (EMH): The hypothesis that  prices of securities fully  and immediately  reflect available  information about securities.  How? Market participants process all relevant information  rationally  and quickly. Relevant information: – Published economic reports – News articles about a firm – Seasonality of a firm’s earnings – Information from a firm’s annual report
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3 Introduction Why important? – Adam Smith’s invisible hand. How does it work? – Competition as the source of efficiency Random walk: The notion that stock price changes are  random and unpredictable.
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4 Versions of the EMH What is meant by the term “all available information”? Weak-form EMH – Stock prices reflect all past  market trading information. History of past prices, trading volume, short interest… Semistrong-form EMH – Stock prices reflect all publicly available information Past market trading + fundamental data, quality of mgmt, earnings  forecast, balance sheet composition Strong-form EMH – Stock prices reflect all available information + inside information
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5 Implications of the EMH
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This note was uploaded on 12/03/2009 for the course FIN 4504 taught by Professor Banko during the Fall '08 term at University of Florida.

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Topic 8 EMH - Topic8: EfficientMarketHypothesis FIN4504...

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