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    Efficient Markets EMH Lecture Complete

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    Preet Lohana
    Efficient Market

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    © All Rights Reserved
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    Efficient Markets EMH Lecture Complete

    Uploaded by

    Preet Lohana
    2 views12 pages
    Efficient Market

    Original Title

    Efficient_Markets_EMH_Lecture_Complete

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    © © All Rights Reserved

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    Efficient Market

    Copyright:

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

    Efficient Markets EMH Lecture Complete

    Uploaded by

    Preet Lohana
    Efficient Market

    Copyright:

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

    EFFICIENT CAPITAL

    MARKETS AND THE


    EFFICIENT MARKET
    HYPOTHESIS (EMH)
    LECTURE OVERVIEW
    INTRODUCTION

    • UNDERSTANDING CAPITAL MARKET EFFICIENCY:


    • • WHAT DOES IT MEAN FOR CAPITAL MARKETS TO BE EFFICIENT?
    • • WHY SHOULD CAPITAL MARKETS BE EFFICIENT?
    • • WHAT FACTORS CONTRIBUTE TO AN EFFICIENT MARKET?
    • • WHAT ARE THE THREE SUBHYPOTHESES OF EMH?
    • • HOW DO WE TEST EMH SUBHYPOTHESES?
    • • WHAT ARE ANOMALIES RELATED TO EMH?
    • • WHAT IS BEHAVIORAL FINANCE?
    • • IMPLICATIONS FOR EMH AND INVESTING.
    EFFICIENT CAPITAL
    MARKETS:
     PRICES REFLECT ALL
    DEFINING
    AVAILABLE INFORMATION.
    CAPITAL
     PRICES ADJUST QUICKLY TO
    MARKET
    NEW INFORMATION.
    EFFICIENCY
     INVESTORS CANNOT
    CONSISTENTLY
    OUTPERFORM THE MARKET.
    EFFICIENT MARKET HYPOTHESIS

    • AN INVESTMENT THEORY WHICH SUGGESTS THAT THE


    PRICES OF FINANCIAL INSTRUMENTS REFLECT ALL
    AVAILABLE MARKET INFORMATION.
    • STATES THAT WHEN NEW INFORMATION COMES INTO THE
    MARKET, IT IS IMMEDIATELY REFLECTED IN STOCK PRICES.
    • NEITHER TECHNICAL ANALYSIS (THE STUDY OF PAST STOCK
    PRICES IN AN ATTEMPT TO PREDICT FUTURE PRICES) NOR
    FUNDAMENTAL ANALYSIS (THE STUDY OF FINANCIAL
    INFORMATION) CAN HELP AN INVESTOR.
    Reasons for Market
    Efficiency:

    • Investor Rationality: Market


    WHY participants act rationally on
    information.
    SHOULD
    CAPITAL • Transparency: Provides fair
    MARKETS competition and accurate
    pricing.
    BE
    EFFICIENT? • Free Flow of Information:
    Ensures equal opportunities
    for all investors.
    Key Factors:
    • Availability of
    FACTORS Information: Accurate
    CONTRIBUTI and timely data
    NG TO
    MARKET dissemination.
    EFFICIENCY • Number of
    Participants: More
    participants ensure
    correct pricing.
    • Low Transaction
    Costs: Faster market
    responses to new
    Three Forms of EMH:

    THE • Weak Form: Prices reflect


    past market data. Technical
    EFFICIENT analysis is ineffective.
    MARKET
    • Semi-Strong Form: Prices
    HYPOTHE reflect all public information.
    SIS (EMH) Fundamental analysis is
    ineffective.

    • Strong Form: Prices reflect


    all information, even insider
    knowledge.
    How to Test the EMH:

    • Weak Form: Analyze if


    TESTIN past prices predict future
    prices.
    G THE
    • Semi-Strong Form:
    EMH Examine how quickly prices
    adjust to public information.

    • Strong Form: Test if insider


    information provides
    abnormal returns.
    Results Supporting and
    Contradicting EMH:
    SUPPORTIN
    G RESULTS
    • Support: Weak and
    AND semi-strong forms
    ANOMALIE generally supported by
    S research.
    • Anomalies: January
    effect, small-firm effect,
    behavioral anomalies.
    CHALLENGES FROM BEHAVIORAL
    FINANCE:
    • OVERCONFIDENCE: LEADS TO
    BEHAVIOR EXCESSIVE TRADING AND
    AL VOLATILITY.
    FINANCE
    • HERD BEHAVIOR: CAUSES BUBBLES
    AND EMH
    AND CRASHES.
    • ANCHORING: INVESTORS RELY TOO
    MUCH ON INITIAL INFORMATION.
    IMPLICATIONS OF
    EMH TEST RESULTS
    • IMPLICATIONS FOR INVESTORS:
    • • TECHNICAL ANALYSIS: INEFFECTIVE
    IN WEAK FORM EFFICIENT MARKETS.
    • • FUNDAMENTAL ANALYSIS:
    INEFFECTIVE IN SEMI-STRONG FORM
    EFFICIENT MARKETS.
    • • PORTFOLIO MANAGERS: DIFFICULT TO
    CONSISTENTLY OUTPERFORM THE
    MARKET.
    CONCLUSION

    • KEY TAKEAWAYS:
    • • EFFICIENT MARKETS ADJUST RAPIDLY TO NEW
    INFORMATION.
    • • EMH IS SUPPORTED BY EVIDENCE BUT ALSO FACES
    CHALLENGES FROM ANOMALIES AND BEHAVIORAL
    FINANCE.

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