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    Market Efficiency 02: What Would Happen in The Efficient Market ?

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    Phan Nguyễn Diệu Phước
    1. The efficient market hypothesis states that stock prices always fully reflect all available information. 2. In an efficient market, investors cannot obtain excess returns as all costs and risks are already factored into prices. Simulated trading strategies would fail to generate returns. 3. There are three forms of market efficiency - weak (prices follow random walks), semi-strong (all public information reflected in prices), and strong (all public and private information reflected in prices).

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    Market Efficiency 02: What Would Happen in The Efficient Market ?

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    Phan Nguyễn Diệu Phước
    36 views12 pages
    1. The efficient market hypothesis states that stock prices always fully reflect all available information. 2. In an efficient market, investors cannot obtain excess returns as all costs and risks are already factored into prices. Simulated trading strategies would fail to generate returns. 3. There are three forms of market efficiency - weak (prices follow random walks), semi-strong (all public information reflected in prices), and strong (all public and private information reflected in prices).

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    2 Market efficiency

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    1. The efficient market hypothesis states that stock prices always fully reflect all available information. 2. In an efficient market, investors cannot obtain excess returns as all costs and risks are already factored into prices. Simulated trading strategies would fail to generate returns. 3. There are three forms of market efficiency - weak (prices follow random walks), semi-strong (all public information reflected in prices), and strong (all public and private information reflected in prices).

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    36 views12 pages

    Market Efficiency 02: What Would Happen in The Efficient Market ?

    Uploaded by

    Phan Nguyễn Diệu Phước
    1. The efficient market hypothesis states that stock prices always fully reflect all available information. 2. In an efficient market, investors cannot obtain excess returns as all costs and risks are already factored into prices. Simulated trading strategies would fail to generate returns. 3. There are three forms of market efficiency - weak (prices follow random walks), semi-strong (all public information reflected in prices), and strong (all public and private information reflected in prices).

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 12

    02

    MARKET
    EFFICIENCY
    What would happen
    in the efficient
    market ?
    2.1 Efficiency and
    information

    Market efficiency: a market


    Effi c i e nt market in which prices always fully
    sis
    hypothe reflect all available
    information.
    2.1 Efficiency and
    information 2

    What should be true if the The stock prices volatiles


    market is efficient? randomly without any
    possible anticipated
    techniques.
    1 Price
    (P)
    ?
    The stock prices response
    quickly to the new
    information. They are
    Time (t)
    fairly, perfectly priced at
    any given time.
    2.1 Efficiency and
    information
    4

    What should be true if the In this market, investors


    market is efficient? could not get any excess
    returns, all costs and risks
    are factored in already.
    3
    5
    Simulated tradings would Value and price should be
    be fail. identical.
    2.1 Efficiency and
    information Simulated
    tradings
    When the investors could
    using stategies to get excess
    return, by using:
    - Data mining
    - Historical data
    - …
    => Those are preliminary
    Price % change of Pfizer firm’s stocks evidences fight against the
    Efficient Market Hypothesis
    (EMH).
    2.1 Efficiency and
    information
    3 form
    There are 3 tenets of market efficiency to s of
    clarify how the information is reflected at
    every level
    EMH

    Weak
    historical information,
    stock prices follow
    “random walks”.
    Strong
    Semi-strong
    all relevant information,
    historical and publicly private information
    available information. inclusive.
    Example
    how could efficient market be described?

    At 10 AM, a company pronounced a new profitable


    project which brings more 10.000 VND per share for
    the firm. The initial price per share is 105,000 VND.
    There are 3 scenarios describe the efficiency of the
    market
    The price will The price will stay
    The price will
    rise up to the same
    rise up to
    115,000/share 105,000/share
    125,000/share
    -> efficient -> underreaction
    -> overreaction
    2.2. MISCONCEPTIONS
    ABOUT MARKET
    EFFICIENCY
    3 Any stock or
    portfolio is as good
    1 Individual investors as any other
    are ill-advised

    4 Price levels are


    2 The same expected random
    return
    2.3 JOINT HYPOTHESIS
    PROBLEM

    EMH: efficient market


    hypothesis
    All tests of market
    Rejection means:
    efficiency have two
    maintained hypotheses:
    – Markets are not efficient.

    – Method for calculating fair


    – Markets are efficient. returns is faulty.

    – A fair return on a security or – Or both


    portfolio is from a particular model
    (in early tests this model was usually
    CAPM).
    2.3
    2.3 The EMH
    does not hold
    If a test rejects the
    EMH
    ButOrwhich?
    not properly measure
    excess returns

    Joint hypothesis problem!


    2.3

    VALUE STOCK
    vid en ce
    E
    against (Price < Book value)
    h e E M H
    t

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