note02 (1)

note02 (1) - 1 Chapter 8 and 9 Efficient Market Hypothesis...

Info iconThis preview shows pages 1–19. Sign up to view the full content.

View Full Document Right Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

View Full DocumentRight Arrow Icon

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

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

Unformatted text preview: 1 Chapter 8 and 9 Efficient Market Hypothesis and Behavioral Finance 2 Efficient Market Hypothesis (EMH) Do security prices reflect information ? Why look at market efficiency Implications for business and corporate finance Implications for investment 3 Random Walk - stock prices are random Actually submartingale Expected price is positive over time Positive trend and random about the trend Random Walk and the EMH 4 Security Security Prices Prices Time Time Random Walk with Positive Trend 5 Why are price changes random? Prices react to information Flow of information is random Therefore, price changes are random Random Price Changes 6 EMH and Competition Stock prices fully and accurately reflect publicly available information Once information becomes available, market participants analyze it Competition assures prices reflect information 7 Figure 8-1 Cumulative Abnormal Returns Surrounding Takeover Attempts 8 Figure 8-2 Returns Following Earnings Announcements 9 Forms of the EMH Weak Semi-strong Strong 10 10 Are Markets Efficient? The Magnitude Issue- Consider an investment manager overseeing a $2 billion portfolio. - If she can improve performance by only 1/10th of 1 percent per year, that effort will be worth .001 x $2 billion = $2 million annually. - This manager clearly would be worth her salary! Yet can we, as observers, statistically measure her contribution? - Probably not: a 1/10th of 1 percent contribution would be swamped by the yearly volatility of the market 11 11 Are Markets Efficient? The Selection Bias Issue- Only investors who find that an investment scheme cannot generate abnormal returns will be willing to report their findings to the whole world. The Lucky Event Issue- If many investors using a variety of schemes make fair bets, statistically speaking, some of those investors will be lucky and win a great majority of the bets. - The winners, though, turn up in The Wall Street Journal as the latest stock market gurus; then they can make a fortune publishing market newsletters. 12 Types of Stock Analysis Technical Analysis - using prices and volume information to predict future prices Weak form efficiency & technical analysis Fundamental Analysis - using economic and accounting information to predict stock prices Semi strong form efficiency & fundamental analysis 13 Active Management Security analysis Timing Passive Management Buy and Hold Index Funds Implications of Efficiency for Active or Passive Management 14 Even if the market is efficient a role exists for portfolio management Appropriate risk level Tax considerations Other considerations Market Efficiency and Portfolio Management 15 Event studies Assessing performance of professional managers Testing some trading rule Empirical Tests of Market Efficiency 16 1. Examine prices and returns over time How Tests Are Structured 17 +t +t-t-t Announcement Date Announcement Date Returns Surrounding the Event 18 2. Returns are adjusted to determine if they are abnormal Market Model approach...
View Full Document

Page1 / 111

note02 (1) - 1 Chapter 8 and 9 Efficient Market Hypothesis...

This preview shows document pages 1 - 19. Sign up to view the full document.

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