Professional Documents
Culture Documents
to accompany
Chapter 6
Chapter 6
Efficient Capital Markets
Questions to be answered:
What is does it mean to say that capital markets are
efficient?
Why should capital markets be efficient?
What factors contribute to an efficient market?
Given the overall efficient market hypothesis, what are
the three sub-hypotheses and what are the implications of
each of them?
Chapter 6
Efficient Capital Markets
How do you test the three efficient market
hypothesis (EMH) and what are the results of the
tests?
For each set of tests, which results support the
hypothesis and which results indicate an anomaly
related to the hypothesis?
What is behavioral finance and how does it relate
to the EMH?
Chapter 6
Efficient Capital Markets
What are the major findings of behavioral finance and
what are the implications of these findings for EMH?
What are the implications of the efficient market
hypothesis test results for
Technical analysis?
Fundamental analysis?
Portfolio managers with superior analysts?
Portfolio managers with inferior analysts?
Efficient Capital Markets
In an efficient capital market, security prices
adjust rapidly to the arrival of new information.
Therefore, the current prices of securities
reflect all information about the security
Whether markets are efficient has been
extensively researched and remains
controversial
Why Should Capital Markets
Be Efficient?
The premises of an efficient market
A large number of competing profit-maximizing participants
analyze and value securities, each independently of the
others
New information regarding securities comes to the market in
a random fashion
Profit-maximizing investors adjust security prices rapidly to
reflect the effect of new information
Conclusion: In an efficient market, the expected returns
implicit in the current price of a security should reflect
its risk
Alternative
Efficient Market Hypotheses (EMH)
Random Walk Hypothesis changes in security
prices occur randomly
Fair Game Model current market price reflect all
available information about a security and the
expected return based upon this price is consistent
with its risk
Efficient Market Hypothesis (EMH) - divided into
three sub-hypotheses depending on the information
set involved
Efficient Market Hypotheses (EMH)