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CHAPTER 9

CHAPTER 9. Efficient Market Hypothesis. What are we going to learn in this chaper ?. If you knew Koza Altın’s stock price is going to jump from 30 TL to 40 TL in 3 days what would you do?.

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CHAPTER 9

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  1. CHAPTER 9 Efficient Market Hypothesis

  2. Whatarewegoingtolearn in thischaper?

  3. Ifyouknew Koza Altın’sstockprice is goingtojumpfrom 30 TL to 40 TL in 3 dayswhatwouldyou do?

  4. Ifalltheinvestorsknew Koza Altın’sstockprice is goingtojumpfrom 30 TL to 40 TL in 3 dayswhatwouldthey do?

  5. RandomWalk • Predictionwithgreatconfidence • Immediate buy orders • Noonewillingtosell • Immediatepricejump

  6. RandomWalk • Predictedjumpbeingreflectedimmediately • Informationreflectionintoprices • Underpricedstock • New information • Unpredictablenews

  7. RandomWalk • Randomwalk • Rationalinvestors • Competinginvestors • Importance of newinformation • Efficientmarket hypothesis (EMH)

  8. Efficiency: Illustrations • Responseof stock prices to new information inan efficient market. (takeoverannouncement, premium, publicannouncement) • StockpricesfollowingCNBC’sMorningsegmentmentioning

  9. Efficiency: Illustrations

  10. Efficiency: Illustrations

  11. Versions of EMH • Weak-form efficiency • Semistrong-form efficiency • Strong-form efficiency

  12. TechnicalAnalysis • Technical analysis • Searchfor recurrent and predictable patterns in stockprices • Doestechnicalanalysiscontradict EMH?

  13. TechnicalAnalysis • Opportunity of exploitingto make a profit • Relative strength approach • Resistance levels • Support levels • Example of resistancelevel

  14. TechnicalAnalysis • The efficient market hypothesis implies that technical analysis is without merit • Reflectionintostockprices • Abnormalreturnsandexpectationsaboutthem • Example: the marketbelievesthat a level of TL 8 truly isa resistance level for Mardin çimento stocks

  15. TechnicalAnalysis • Willa technicalrule that seems to work will continue to work in the future once it becomes widelrecognized? • Doesthe rule itself becomes reflected in stock prices once itsvalue is discovered? • Self-destructingpatterns • Yet-undiscoveredrules

  16. FundamentalAnalysis • What’sFundamentalAnalysis? • Whichinformationdoes fundamentalanalysis use? • Comparison of impliedandcurrentprices • Doesthefundamentalanalysiscontradict EMH? • An attempt to find firms that are better thaneveryone else’s estimate

  17. Active vs. PassivePortfolioManagement • Let’sassumeyouhave 10,000 TL andfind an opportunitytoearnextra 1 %. Howgood is this? • AmyLucaswhoruns a portfolio of 10 billion $ finds an opportunitytoearnextra 1 %. Howgood is this? • Costs? • Is watching CNBCE goingtohelpyoubecomerich?

  18. Active vs. PassivePortfolioManagement • If small investors are not in a favored position to conduct active portfolio management,what are their choices? • Mutualfundsandtheirbenefits • Can investors be sure that even large mutualfunds have the ability or resources to uncover mispriced stocks?

  19. Active vs. PassivePortfolioManagement • Wouldtheproponent of EMH suggestactiveportfoliomanagement? • Passivestrategtyand buy-and-holdreturns • IndexFund

  20. Active vs. PassivePortfolioManagement

  21. PortfolioManagementunder EMH • If the market is efficient, why not pick stocks by throwing darts at Borsa Istanbul? • Whybothertryingtodiversify? • Whichstocksshoulda Toyota executive whose annual bonus depends on Toyota’sprofits generally not invest additional amounts in? • Wouldyouinvest in thesameportfolioassetsrightnow as youwouldwhenyouare 67 yearsold?

  22. PortfolioManagementunder EMH • Investors of varying ages also might warrant different portfolio policies with regardto risk bearing. For example, older investors who are essentially living off savings mightchoose to avoid long-term bonds whose market values fluctuate dramatically with changesin interest rates (discussed in Part Four). Because these investors are living off accumulatedsavings, they require conservation of principal. In contrast, younger investors might bemore inclined toward long-term inflation-indexed bonds. The steady flow of real incomeover long periods of time that is locked in with these bonds can be more important thanpreservation of principal to those with long life expectancies.In conclusion, there is a role for portfolio management even in an efficient market.Investors’ optimal positions will vary according to factors such as age, tax bracket, riskaversion, andemployment.

  23. Howcouldyou test whethermarketsareefficientor not?

  24. EventStudies • Event study (dividendchanges) • Oughtto be return • Abnormalreturn

  25. EventStudies • Benchmarks • Assetpricingmodels • Leakage of information • Cumulativeabnormalreturns

  26. Weak-form EfficiencyTests • Returns over Short Horizons (Serial correlation) (Positive serial correlation) (Negative serial correlation) • Returns over Long Horizons

  27. Semistrong-form EfficiencyTests • Market anomalies • Risk adjustmentand CAPM • Size effect • Januaryeffect

  28. Semistrong-form EfficiencyTests • Neglectedfirmeffect • Liquidityeffect • Book-to-market ratioanomaly • Post-earningsannouncementdrift

  29. Size Effect

  30. Book-to-Market Effect

  31. Post-earningsAnnouncementDrift

  32. Strong Form EfficiencyTests • Whoareinsiders? • Can theybenefit in anyway? • Whydoesnooneregulatethem?

  33. END OF CHAPTER

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