Ch13 - Chapter 13 Ecient Market Hypothesis Road Map Part A...

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Unformatted text preview: Chapter 13 Ecient Market Hypothesis Road Map Part A Introduction to Finance. Part B Valuation of assets, given discount rates. Part C Determination of discount rates. Part D Introduction to corporate finance. Ecient Market Hypothesis (EMH). Capital investment decisions (capital budgeting). Financing decisions. Main Issues Ecient Market Hypothesis (EMH) Empirical evidence on EMH Implications of EMH Questions and practical issues about EMH 13-2 Ecient Market Hypothesis Chapter 13 Contents 1 Ecient Market Hypothesis (EMH) . . . . . . . . . . . . . . 13-3 2 Empirical Tests of EMH . . . . . . . . . . . . . . . . . . . . 13-6 2.1 Supportive Evidence of EMH . . . . . . . . . . . . . . . . . . . . 13-7 2.2 Negative Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . 13-12 3 Implications of EMH . . . . . . . . . . . . . . . . . . . . . . 13-14 4 Questions about EMH . . . . . . . . . . . . . . . . . . . . . 13-15 5 Practical Issues about EMH . . . . . . . . . . . . . . . . . . 13-16 6 Homework . . . . . . . . . . . . . . . . . . . . . . . . . . . 13-17 15.407 Lecture Notes Fall 2003 c Jiang Wang Chapter 13 Ecient Market Hypothesis 13-3 1 Ecient Market Hypothesis (EMH) In an ecient financial market, an assets price should be the best possible estimate of its economic values. Definition : A financial market is (informationally) ecient when market prices reect all available information about value. A precise definition needs to answer two questions: 1. What is all available information? 2. What does it mean to reect all available information? Different answers to these questions give rise to different versions of market eciency. c Jiang Wang Fall 2003 15.407 Lecture Notes 13-4 Ecient Market Hypothesis Chapter 13 Intuitive answers to these two questions: 1. All available information includes: (a) Past prices Weak form. (b) All public information Semi-Strong Form.- past prices, news, etc. (c) All information including inside information Strong Form. 2. Prices reect all available information means that financial transactions at market prices, using the available information, are zero NPV activities....
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Ch13 - Chapter 13 Ecient Market Hypothesis Road Map Part A...

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