1 / 12

Understanding Efficient Market Hypothesis (EMH) in Modern Finance

Learn about EMH definitions by Fama, implications, and anomalies like noise trader theory and serial correlation in behavioral economics. Prepare for the Economics final exam on May 3rd.

yvette-washington
Download Presentation

Understanding Efficient Market Hypothesis (EMH) in Modern Finance

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Behavioral Finance Economics 437

  2. Final Exam Friday 2PM May 3rd in Chem Lecture Hall • 2 PM to 5 PM (should take 1 ½ to 2 hours for most students) • Comprehensive: 40 – 50 percent on material since the 2nd mid term • Format similar to mid term exam format ( 2 to 5 more questions than a typical mid term)

  3. What is EMH? • Three Definitions: • Prices “capture” all relevant information • Fama’s three definitions: weak, semi-strong, strong • Martingale • All three are, more or less, the same

  4. The Efficient Market Hypothesis(EMH) • Price captures all relevant information • Modern version based upon “No Arbitrage” assumption • Why do we care? • Implications • Only new information effects prices • Publicly known information has no value • Investors should “index” • Allocation efficiency

  5. Definition of EMH (Eugene Fama’s Definition) from Shleifer’s Chapter One • Weak Hypothesis: past prices and returns are irrelevant • Semi-Strong Hypothesis: all publicly known information is irrelevant • Strong Hypothesis: public and private information is irrelevant

  6. Random Walk Around a Rising Trend (This is a martingale with trend subtracted out) 2 1 time

  7. Modern Finance Assumes • Stock Prices (Adjusted) Follow a Martingale Process • This is the definition of EMH in the modern finance literature • Also known as “random walk”

  8. Noise Trader Theory (mainly Shleifer, etal) • Shleifer, Etal • Definition of “agents” • Definition of assets • Conclusions

  9. Anomalies • Biases, Heuristics • Status Quo, Endowment, Saliency, Mental Accounting, Framing • Loss Aversion (prospect theory)

  10. Serial Correlation • Fama-French and DeBondt-Thaler • Jegadeesh-Titman • Calendar Effects

  11. Other • Corporate Governance • Equity Premium Puzzle

  12. The End

More Related