The Efficient Market Hypothesis CHAPTER 8

Transcript:The Efficient Market Hypothesis CHAPTER 8:
The Efficient Market Hypothesis CHAPTER 8 Introduce the Efficient Market Hypothesis (EMH) (效率市場假說) Discuss the practicability of technical and fundamental analyses (技術與基本分析的可行性) and the active asset management (主動式資產管理) under different forms of the EMH Cite evidence that supports or disproves the EMH Examine the EMH by analyzing the performance of stock analysts and fund managers ※ There is a lot of descriptive content in Ch. 8, so I rearrange the lecture slides in a more logical and succinct way Learning Goals of Chapter 8 8.1 RANDOM WALKS AND THE EFFICIENT MARKET Efficient Market Hypothesis (EMH) Kendall (1953) first found that it is almost impossible to identify predictable patterns in stock prices Stock prices seem to evolve randomly The past performance provided no way to predict future price movements Some economists treated these results from the irrationality (非理性) of the market Because they believe that similar to predicting the business cycle or GDP of a nation, it is possible to predict stock prices They soon realized that random price movements indicate a well-functioning or efficient market, not an irrational one Efficient Market Hypothesis (EMH) The following arguments support that the stock prices are unpredictable in efficient markets Stock prices react immediately to all news due to the pursuit for profit Suppose there is an accurate forecast that the stock price of XYZ will rise by 30% in one week Every investor intends to buy the shares of XYZ, but no stockholders of XYZ are willing to sell As a result, the stock price rises immediately to a proper level to reflect this good news Therefore, a forecast about future performance leads to current stock price movement Equivalently, we can say that the current stock price has already reflected all information that could be used to predict the future performance of the firm Efficient Market Hypothesis (EMH) Competition leads to information disclosure Competition among many professional, highly paid, aggressive analysts ensures that all relevant information can be discovered soon in the stock markets Based on the discovered information, they can trade stocks such that stock prices ought to jump to their proper levels by reflecting available information New information occurs and is discovered randomly  Stock prices change randomly We can further conclude that the past performance is irrelevant with future performance ※ The pursuit for profit and the competition among investors to discover information are key factors to make market efficient