Chap08 - Chapter 8: Efficient Market Hypothesis (EMH)...

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Ch8 Efficient Market Hypothesis 1 Chapter 8: Efficient Market Hypothesis (EMH) Random walk and market efficiency Forms of EMH Weak-form tests Semistrong tests Strong-form tests Are markets efficient? Market efficiency and portfolio management
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Ch8 Efficient Market Hypothesis 2 Efficient Market Hypothesis (EMH) Prices of securities fully reflect available information. Security prices react instantaneously to new information, and do so in an unbiased manner If EMH is true, are the stock prices predictable?
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Ch8 Efficient Market Hypothesis 3 Reaction of Stock Price to New Information in Efficient and Inefficient Markets Efficient market reaction: The price instantaneously adjusts to and fully reflects new information; there is no tendency for subsequent increases and decreases. Delayed reaction: The price partially adjusts to the new information; 8 days elapse before the price completely reflects the new information Overreaction: The price overadjusts to the new information; it “overshoots” the new price and subsequently corrects. Price ($) Days relative to announcement day –8 –6 –4 –2 0 +2 +4 +6 +7 220 180 140 100 Overreaction and correction Delayed reaction Efficient market reaction
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Ch8 Efficient Market Hypothesis 4 Random walk If EMH is true, stock price changes are random and unpredictable Maurice Kendall (1953) found that he could identify no predictable patterns on stock prices.
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Ch8 Efficient Market Hypothesis 5 Cumulative Abnormal Returns Around Takeover Attempts: Target Companies
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Ch8 Efficient Market Hypothesis 6 Stock Price Reaction to CNBC Reports
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This note was uploaded on 03/29/2012 for the course ECON 101 taught by Professor Schneider during the Spring '11 term at Kansas State University.

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Chap08 - Chapter 8: Efficient Market Hypothesis (EMH)...

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