Efficient Market Hypothesis

1521 Words Mar 15th, 2011 7 Pages
Chapter 13
Efficient Market Hypothesis
Road Map
Part A Introduction to Finance.
Part B Valuation of assets, given discount rates.
Part C Determination of discount rates.
Part D Introduction to corporate finance.
• Efficient Market Hypothesis (EMH).
• Capital investment decisions (capital budgeting).
• Financing decisions.
Main Issues
• Efficient Market Hypothesis (EMH)
• Empirical evidence on EMH
• Implications of EMH
• Questions and practical issues about EMH
13-2 Efficient Market Hypothesis Chapter 13
Contents
1 EfficientMarket Hypothesis (EMH) . . . . . . . . . . . . . . 13-3
2 Empirical Tests of EMH . . . . . . . . . . . . . . . . . . . . 13-6
2.1 Supportive Evidence of EMH . . . . . . . . . . . . . . . . . . . .
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USA 0.03 UK 0.08
France -0.01 Italy -0.02
Germany 0.08 Holland 0.03
Belgium -0.02 Switzerland 0.01
Sweden 0.06
Returns on Two Successive Days for Weyerhaeuser (1963-1993)
Source: T. Crack and O. Ledoit, “Robust Structure without Predictability: The
‘Compass Rose’ Pattern of the Stock Market.” Journal of Finance (1996).
15.407 Lecture Notes Fall 2003 _c Jiang Wang
Chapter 13 Efficient Market Hypothesis 13-9
2. Semi-strong form of EMH is generally supported by the data.
_ Prices react to news quickly.
Cumulative Abnormal Returns (CAR) befor and after Dividend Announcements
Cumulative Abnormal Returns (CAR) before and after Takeover Attempts: Target Companies
Source: A. Keown and J. Pinkerton, “Merger Announcements and Insider
Trading Activity.” Journal of Finance (1981).
_c Jiang Wang Fall 2003 15.407 Lecture Notes
13-10 Efficient Market Hypothesis Chapter 13
3. Strong-form of EMH has mixed evidence:
_ Money managers cannot consistently outperform.
Mutual Fund Performance (Gross of Expenses)
Source: M. Jensen, “Risks, the Pricing of Capital Assets, and the Evaluation of
Investment Performance.” Journal of Business (April 1969).
Performance of Average Equity Mutual Funds
15.407 Lecture Notes Fall 2003 _c Jiang Wang
Chapter 13 Efficient Market Hypothesis 13-11
_ Inside-trading is profitable — or is it?
Cumulative Abnormal Return (CAR) of Insider Trading

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