Ch13 - Chapter 13 Efficient Market Hypothesis Road Map Part...

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Unformatted text preview: Chapter 13 Efficient 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. • Efficient Market Hypothesis (EMH). • Capital investment decisions (capital budgeting). • Financing decisions. Main Issues • Efficient Market Hypothesis (EMH) • Empirical evidence on EMH • Implications of EMH • Questions and practical issues about EMH 13-2 Efficient Market Hypothesis Chapter 13 Contents 1 Efficient 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 Efficient Market Hypothesis 13-3 1 Efficient Market Hypothesis (EMH) In an efficient financial market, an asset’s price should be the best possible estimate of its economic values. Definition : A financial market is (informationally) efficient when market prices reflect 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 “reflect all available information”? Different answers to these questions give rise to different versions of market efficiency. c ° Jiang Wang Fall 2003 15.407 Lecture Notes 13-4 Efficient 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 reflect 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 Efficient Market Hypothesis Road Map Part...

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