Bus 315 - Week13

Bus 315 - Week13 - Week 13 Equilibrium in Capital Markets...

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Week 13 Equilibrium in Capital Markets III: Market Efficiency - Bodie et al., Ch. 10 Empirical Evidence on Security Returns - Bodie et al., Ch. 12 1 Jorge Cruz Lopez - Bus 315: Investments
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Market Efficiency Objective: To discuss the efficient market hypothesis and to examine the empirical evidence related to the notion of market efficiency. 2 Jorge Cruz Lopez - Bus 315: Investments
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Market Efficiency 1. Random Walks and the Efficient Market Hypothesis 2. Implications of the EMH for Investment Policy 3. Event Studies 4. Are Markets Efficient? 5. Mutual Funds and Analyst Performance 3 Jorge Cruz Lopez - Bus 315: Investments
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1. Random Walks and the Efficient Market Hypothesis 4 Jorge Cruz Lopez - Bus 315: Investments
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Market Efficiency Do security prices reflect information? Why is market efficiency important? – Implications for business and corporate finance. – Implications for investment. 5 Jorge Cruz Lopez - Bus 315: Investments
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Random Walk and the EMH Random Walk Hypothesis: Stock prices change unpredictably. 6 t s t P P E ) ( 2 2 ) ( s E s t t t t P P 1 0 ) , ( ; 0 ) ( is s t t t E E iid Jorge Cruz Lopez - Bus 315: Investments
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Random Walk and the EMH • Actually stock prices follow a submartingale: – Expected price change is positive over time. – Positive trend and random around the trend. 7 t t t d P P 1 drift d sd P P E t s t ) ( 2 2 ) ( s E s t Jorge Cruz Lopez - Bus 315: Investments
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Stock Price Reaction to CNBC Reports 8 Jorge Cruz Lopez - Bus 315: Investments
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Random Price Changes Kendall (1953): – Prices are dominated by erratic market psychology or “animal spirits”. Why are price changes random? – Prices react to information. – Flow of information is random. – Therefore, price changes are random. 9 Jorge Cruz Lopez - Bus 315: Investments
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EMH and Competition • Stock prices fully and accurately reflect publicly available information. • Once information becomes available, market participants analyze it and trade based on this information. • Competition ensures that prices reflect available information. 10 Jorge Cruz Lopez - Bus 315: Investments
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Versions of the EMH Weak: All past market trading information (historical data). Semi-strong: All publicly available information regarding the prospects of a firm. Strong: All (public and private) information relevant to the firm. 11 Jorge Cruz Lopez - Bus 315: Investments
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2. Implications of the EMH for Investment Policy 12 Jorge Cruz Lopez - Bus 315: Investments
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Types of Stock Analysis Technical Analysis: Using prices and volume information to predict future prices. – Weak form efficiency & technical analysis.
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This note was uploaded on 12/06/2011 for the course BUS 315 taught by Professor N.a during the Spring '09 term at Simon Fraser.

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Bus 315 - Week13 - Week 13 Equilibrium in Capital Markets...

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