Main contents The concept of efficient capital markets Alternative efficient market hypotheses The tests and results of emes The implication of EMHs
Main Contents • The concept of efficient capital markets • Alternative efficient market hypotheses • The tests and results of EMHs • The implication of EMHs
Efficient Capital Markets Efficient capital market is one in which security prices adjust rapidly to the arrival of new information and. therefore the current prices of securities reflect all information about the security. Efficient Market Hypotheses(EMi)are those alternative hypotheses which consider the efficiency of the markets
Efficient Capital Markets • Efficient capital market is one in which security prices adjust rapidly to the arrival of new information and, therefore, the current prices of securities reflect all information about the security. • Efficient Market Hypotheses (EMH ) are those alternative hypotheses which consider the efficiency of the markets
Efficient Capital Markets An efficient capital market imply 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, and the timing of one announcement is independent of others
Efficient Capital Markets • An efficient capital market imply: – A large number of competing profitmaximizing participants analyze and value securities, each independently of the others. – New information regarding securities comes to the market in a random fashion, and the timing of one announcement is independent of others
Efficient Capital Markets The competing investors attempt to adjust security prices rapidly to reflect the effect of new information, although imperfect and unbiased. The security prices that prevail at any times should be an un biased reflection of all currently available information. The expected returns implicit in the current price should reflect its risk
Efficient Capital Markets – The competing investors attempt to adjust security prices rapidly to reflect the effect of new information, although imperfect and unbiased. – The security prices that prevail at any times should be an unbiased reflection of all currently available information. The expected returns implicit in the current price should reflect its risk
Efficient Capital Markets Random walk hypothesis the notion that stock prices changes are random and unpredictable Dealing with price movement over time Efficient market hypothesis the notion that stock prices already fully reflect all available information The fair game model( specified time)
Efficient Capital Markets • Random walk hypothesis – the notion that stock prices changes are random and unpredictable. – Dealing with price movement over time • Efficient market hypothesis – the notion that stock prices already fully reflect all available information. – The fair game model( specified time)
Efficient Capital Markets Investors will have an incentive to spend time and resources to analyze and uncover new information only if such activity is likely to generate high returns Competition among many well-backed, highly paid, aggressive analysts ensure stock prices ought to reflect available information regarding their proper levels
Efficient Capital Markets • Investors will have an incentive to spend time and resources to analyze and uncover new information only if such activity is likely to generate high returns • Competition among many well-backed, highly paid, aggressive analysts ensure stock prices ought to reflect available information regarding their proper levels
Alternative Emhs The weak-form emh assumes that stock prices fully reflect all security-market information Including the historical of price, rates of return, trading volume data, and other market-generated information such as block trades short interest odd-lot transactions
Alternative EMHs • The weak-form EMH assumes that stock prices fully reflect all security-market information. – Including the historical of price, rates of return, trading volume data, and other market-generated information, such as block trades, short interest, odd-lot transactions
Alternative Emhs The semistrong-form eMH asserts that security prices adjust rapidly to the release of all public information. Public information includes all market and non-market information such as earnings and dividend announcement, P/E ratios. D/P ratios BMV ratios product line, patent held, economic news, political news, etc
Alternative EMHs • The semistrong-form EMH asserts that security prices adjust rapidly to the release of all public information. – Public information includes all market and non-market information, such as earnings and dividend announcement, P/E ratios, D/P ratios, BV/MV ratios, product line, patent held, economic news, political news, etc
Alternative Emhs The strong-form EMH contends that stock prices reflect all information from public and private sources relevant to the firm, including information available only to company insider. It extends the assumption of efficient markets to assume perfect markets in which all information is cost -free and available to everyone at the same time
Alternative EMHs • The strong-form EMH contends that stock prices reflect all information from public and private sources relevant to the firm, including information available only to company insider. – It extends the assumption of efficient markets to assume perfect markets in which all information is cost-free and available to everyone at the same time