Ch8_Kim_BKM_INV_7th - Bodie Kane Marcus Essentials of...

Info icon This preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Essentials of Investments Bodie • Kane • Marcus Chapter 8 The Efficient Market Hypothesis
Image of page 1

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

View Full Document Right Arrow Icon
Essentials of Investments Bodie • Kane • Marcus Efficient Market Hypothesis (EMH) EMH: Prices of securities fully and immediately reflect all available information about securities. A forecast about favorable future performance leads instead to favorable current performance, as market participants all try to get in on the action before the price jump. Stock price should follow Random Walk. Price changes are random and unpredictable. Prices change only in response to new information, which should not be predictable; The stock prices that change in response to new information also must move randomly. If prices were predictable, that would be the evidence of stock market inefficiency.
Image of page 2
Essentials of Investments Bodie • Kane • Marcus Efficient Market Hypothesis (EMH) Any investment strategy cannot make abnormal returns consistently. If there is an investment strategy which can exploit the mispricing, consistent abnormal returns cannot be earned because mispricing will be disappeared. Why should we expect stock prices to reflect all available information? Many investors will try to analyze and uncover new information before any other investors do, in order to improve investment performance. Competition among these many analysts ensures that stock prices ought to reflect available information regarding their proper levels.
Image of page 3

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

View Full Document Right Arrow Icon
Essentials of Investments Bodie • Kane • Marcus Three Versions of the EMH According to the notion of what is meant by the term, “All available information.” Weak-form EMH Stock prices already reflect all information contained in the record of past prices . Trend analysis is meaningless. Semistrong-form EMH Stock prices already reflect not only past prices but also all publicly available information . With semistrong-form efficiency, no consistent abnormal return over a normal return predicted by SML, but an occasional abnormal return only by luck or publicly unavailable information.
Image of page 4
Essentials of Investments Bodie • Kane • Marcus Three Versions of the EMH Semistrong-form EMH (continued) Whenever information is released to public, stock prices will respond only if the information is different from what had been expected. Strong-form EMH Stock prices already reflect all the information , even including information available only to company insiders. Quite extreme version of EMH. If the market is efficient in strong-form, there would be lucky or unlucky investors, but there would not be any superior investment managers who can consistently beat the market.
Image of page 5

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

View Full Document Right Arrow Icon
Essentials of Investments Bodie • Kane • Marcus Implications of EMH: Investment Policy Technical Analysis Research on predictable patterns in stock prices, using prices and volume data, to predict future prices.
Image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern