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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

CHAPTER 9

Efficient Market Hypothesis

slide4

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

random walk
RandomWalk
  • Predictionwithgreatconfidence
  • Immediate buy orders
  • Noonewillingtosell
  • Immediatepricejump
random walk1
RandomWalk
  • Predictedjumpbeingreflectedimmediately
  • Informationreflectionintoprices
  • Underpricedstock
  • New information
  • Unpredictablenews
random walk2
RandomWalk
  • Randomwalk
  • Rationalinvestors
  • Competinginvestors
  • Importance of newinformation
  • Efficientmarket hypothesis (EMH)
efficiency illustrations
Efficiency: Illustrations
  • Responseof stock prices to new information inan efficient market.

(takeoverannouncement, premium, publicannouncement)

  • StockpricesfollowingCNBC’sMorningsegmentmentioning
versions of emh
Versions of EMH
  • Weak-form efficiency
  • Semistrong-form efficiency
  • Strong-form efficiency
technical analysis
TechnicalAnalysis
  • Technical analysis
  • Searchfor recurrent and predictable patterns in stockprices
  • Doestechnicalanalysiscontradict EMH?
technical analysis1
TechnicalAnalysis
  • Opportunity of exploitingto make a profit
  • Relative strength approach
  • Resistance levels
  • Support levels
  • Example of resistancelevel
technical analysis2
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
technical analysis3
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
fundamental analysis
FundamentalAnalysis
  • What’sFundamentalAnalysis?
  • Whichinformationdoes fundamentalanalysis use?
  • Comparison of impliedandcurrentprices
  • Doesthefundamentalanalysiscontradict EMH?
  • An attempt to find firms that are better thaneveryone else’s estimate
active vs passive portfolio management
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?
active vs passive portfolio management1
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?
active vs passive portfolio management2
Active vs. PassivePortfolioManagement
  • Wouldtheproponent of EMH suggestactiveportfoliomanagement?
  • Passivestrategtyand buy-and-holdreturns
  • IndexFund
portfolio management under emh
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?
portfolio management under emh1
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.
event studies
EventStudies
  • Event study

(dividendchanges)

  • Oughtto be return
  • Abnormalreturn
event studies1
EventStudies
  • Benchmarks
  • Assetpricingmodels
  • Leakage of information
  • Cumulativeabnormalreturns
weak form efficiency tests
Weak-form EfficiencyTests
  • Returns over Short Horizons

(Serial correlation)

(Positive serial correlation)

(Negative serial correlation)

  • Returns over Long Horizons
semistrong form efficiency tests
Semistrong-form EfficiencyTests
  • Market anomalies
  • Risk adjustmentand CAPM
  • Size effect
  • Januaryeffect
semistrong form efficiency tests1
Semistrong-form EfficiencyTests
  • Neglectedfirmeffect
  • Liquidityeffect
  • Book-to-market ratioanomaly
  • Post-earningsannouncementdrift
strong form efficiency tests
Strong Form EfficiencyTests
  • Whoareinsiders?
  • Can theybenefit in anyway?
  • Whydoesnooneregulatethem?