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Title: Summary Notes - Efficient Markets Hypothesis (Financial Economics and Asset Pricing)
Description: This is a high-level summary of the Efficient Markets Hypothesis, intended to serve as additional information to the core resources provided by the University. The notes provide a basic overview of the hypothesis and some initial evaluation to get the user to begin think about how to identify pros and cons of a theory. Be sure to undertake your own personal research to ensure you stay updated on developments in research and course materials.
Description: This is a high-level summary of the Efficient Markets Hypothesis, intended to serve as additional information to the core resources provided by the University. The notes provide a basic overview of the hypothesis and some initial evaluation to get the user to begin think about how to identify pros and cons of a theory. Be sure to undertake your own personal research to ensure you stay updated on developments in research and course materials.
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Efficient Markets Hypothesis (EMH) – Summary Notes
EMH asserts that prices in the money and capital markets are efficient
...
Random walks and the EMH
Stock prices should follow a random walk - price changes should be random and
unpredictable
...
Irrationality, on the other hand, could be impacted by present or past information
EMH - The idea that stocks already reflect all available information
Grossman & Stiglitz - Investors will have an incentive to spend time and resources to
analyse and uncover new information only if such activity is likely to generate higher
investment returns
...
Weak form - Asserts that stock prices already reflect all information that can
be derived by examining market trading data (e
...
history of prices)
2
...
Strong form - States that prices reflect all information relevant to the firm,
including private information
...
Returns should not be serially correlated (Zero correlation supports EMH)
Implications of EMH
1
...
This is not rational and irrationality indicates
stock market inefficiency
...
Active or Passive Portfolio Management - The EMH implies that professional
portfolio managers have no informational advantages over other investors
...
Resource allocation - If asset prices are mispriced then incorrect signals are
sent to the market
...
The magnitude issue - Small opportunities will exist to make Significant profits,
even if prices are very close to the true value
...
This may
not be detectable by statistical analysis but may still represent a significant
return
...
The selection bias issue - Tests of the EMH based on published investment
strategies ("tips") will likely show that these strategies are worthless
...
Published techniques may
not work but effective private techniques may exist
...
The Lucky Event issue - A large investment surplus need not imply either special
skill or market inefficiency
...
Unsuccessful management receives little publicity
...
Abnormal performance is
only evidence of inefficiency if it is persistent over time
Title: Summary Notes - Efficient Markets Hypothesis (Financial Economics and Asset Pricing)
Description: This is a high-level summary of the Efficient Markets Hypothesis, intended to serve as additional information to the core resources provided by the University. The notes provide a basic overview of the hypothesis and some initial evaluation to get the user to begin think about how to identify pros and cons of a theory. Be sure to undertake your own personal research to ensure you stay updated on developments in research and course materials.
Description: This is a high-level summary of the Efficient Markets Hypothesis, intended to serve as additional information to the core resources provided by the University. The notes provide a basic overview of the hypothesis and some initial evaluation to get the user to begin think about how to identify pros and cons of a theory. Be sure to undertake your own personal research to ensure you stay updated on developments in research and course materials.