Topic 10 - Topic10 Efficient Markets Readings Chap 13...

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Topic10 Efficient Markets Readings: Chap 13
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2 Efficient Market: Challenger Example “A major malfunction” On January 28, 1986 at 11:39 am EST, the space shuttle Challenger crashed just after launch.
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3 Challenger Example: Market Reaction Source: Journal of corporate finance, vol 9 issue 4, 2003, 453-479
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4 Challenger Example After hearing from February to May 1986, Including the Richard Feynman “ice water” demonstration on February 11, 1986 The Rogers Commission concluded… “…The consensus of the Commission and participating investigative agencies is that the loss of the Space Shuttle Challenger was caused by a failure in the joint between the two lower segments of the right Solid Rocket Motor…” Also known as the “O-Ring” What happens to the stock prices after this finding?
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5 Efficient Markets Observations Stock prices (and financial market prices) react very fast to new information This fast reaction to News makes it hard to “beat the market”. The Efficient Market Hypothesis (EMH) Current market prices fully reflect available information. Therefore, there are no trading strategies that can consistently “beat the market” (on a risk-adjusted basis) Securities represent zero NPV investments: they are expected to return their fair risk-adjusted rate of return
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Technical Analysts Forecast stock prices based on the watching the fluctuations in historical prices
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7 Weak Form Market Efficiency Security prices reflect all information found in past prices and volume Since stock prices only respond to new information - which by definition arrives randomly - stock prices are said to follow a random walk
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Illustrating random walk Consider flipping a coin. What’s the chance your first flip is a head? Ok, that’s easy. See this one: Assume the first flip is a head. Now you’re ready for the second flip. What’s the chance you are going to get a head again? Now assume the first flip is a tail. What’s the
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This note was uploaded on 06/07/2011 for the course FINANCE 103 taught by Professor None during the Spring '11 term at University of Illinois, Urbana Champaign.

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Topic 10 - Topic10 Efficient Markets Readings Chap 13...

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