Lecture_4_2010

Lecture_4_2010 - E4729 Foundations of Finance Lecture 4...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
E4729 Foundations of Finance Lecture 4 July 16, 2010 Leo M. Tilman Faculty, Columbia University
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Market Efficiency
Background image of page 2
3 E4729 Foundations of Finance Efficient Markets Assumptions All investors have costless access to information All investors are capable analysts All investors closely watch market prices and adjust their holdings accordingly Efficient market Every security’s price equals its investment value at all times Investment (or “fair” or “intrinsic”) value is the present value of all the security’s future prospects, as estimated by well-informed and skilled analysts who use all the information currently at hand. Key points to note: Present value of expected (uncertain) future cash flows Well-informed and skilled analysts Information currently at hand
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
4 E4729 Foundations of Finance Efficient Markets An allocationally efficient market is one in which firms with the most promising investment opportunities have access to needed funds Must be both externally and internally efficient to be allocationally efficient Role of regulation Externally efficient market Information is quickly and widely disseminated, thereby allowing each security’s price to adjust rapidly in an unbiased manner to new information so that it reflects investment value Role of technology and informational transparency Internally efficient market Brokers and dealers compete fairly so that the cost of transacting is low and speed of transacting is high Role of regulation & technology
Background image of page 4
5 E4729 Foundations of Finance Market Efficiency Form of Efficiency Set of Information Reflected in Security Price Weak Semi-strong All publicly available information Strong Previous prices of securities All information, both public and private Efficient market Every security’s price equals its investment value at all times A market is efficient with respect to a particular set of information if it is impossible to make abnormal profits (other than by chance) by using this set of information to formulate buying and selling decisions.   t j t t j t t j p r E p E ; 1 ; 1 ; ) ( 1 ) (
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
6 E4729 Foundations of Finance Market Efficiency WEAK Past Prices Semi-Strong: All Public Information Strong: All Public and Private Info
Background image of page 6
7 E4729 Foundations of Finance Market Efficiency In a perfectly efficient market, Investors incorporate any new information immediately and fully into securities prices Price changes are random; they are consequences of investors reassessing the security’s prospects Every security’s price equals its investment value at all times Investment (or “fair” or “intrinsic”) value is the present value of all the security’s future prospects, as estimated by well-informed and skilled analysts who use all the information currently at hand Securities prices below (above) investment value will be purchased (sold),
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 8
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 10/16/2010 for the course IEOR 4729 taught by Professor Leotilman during the Summer '10 term at Columbia.

Page1 / 21

Lecture_4_2010 - E4729 Foundations of Finance Lecture 4...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online