Efficient Market Hypothesis (EMH)(2/2) Efficient market hypothesis Prices fully reflect all available information on a particular stock and/or market. No investor has an advantage in predicting a return on a stock price since no one has access to information not already available to everyone else. >6-11 SDUT Chen Gang Spring 2018
Efficient market hypothesis Prices fully reflect all available information on a particular stock and/or market. No investor has an advantage in predicting a return on a stock price since no one has access to information not already available to everyone else. 6-11 SDUT Chen Gang Spring 2018 Efficient Market Hypothesis (EMH) (2/2)
Financial market efficiency (1/5) Three types of financial market efficiency: allocationally efficient operationally efficient informationally efficient (only this one is focused here) 6-12 SDUT Chen Gang Spring 2018
Financial market efficiency (1/5) Three types of financial market efficiency: allocationally efficient operationally efficient informationally efficient （only this one is focused here） 6-12 SDUT Chen Gang Spring 2018
Financial market efficiency (2/5) Three main factors associated with informational market efficiency The type of information to which the market price reacts The speed at which the market price reacts to information The degree to which market participants over-or under-react to information >6-13 SDUT Chen Gang Spring 2018
Three main factors associated with informational market efficiency The type of information to which the market price reacts The speed at which the market price reacts to information The degree to which market participants over- or under-react to information 6-13 SDUT Chen Gang Spring 2018 Financial market efficiency (2/5)
Financial market efficiency (3/5) Forms of Informational Efficiency Fama(1970)distinguishes three forms of informationally efficient markets: Weak Form Asset prices reflect all historical information Semi-strong Form Asset prices reflect all historical information and all publicly available information >Strong Form Asset prices reflect all historical information,all publicly available information,and all private information >6-14 SDUT Chen Gang Spring 2018
Financial market efficiency Forms of Informational Efficiency Fama (1970) distinguishes three forms of informationally efficient markets: Weak Form Asset prices reflect all historical information Semi-strong Form Asset prices reflect all historical information and all publicly available information Strong Form Asset prices reflect all historical information, all publicly available information, and all private information 6-14 SDUT Chen Gang Spring 2018 Financial market efficiency (3/5)
Financial market efficiency (4/5) Characteristics of an Informationally Efficient Market Price changes cannot be predicted. .The price of the asset is equal to its fundamental(unobserved but true)value. .Prices change due to the inflow of new information,and information flows randomly to the market. Therefore,price changes should be random and unpredictable. >6-15 SDUT Chen Gang Spring 2018
Financial market efficiency (4/5) Characteristics of an Informationally Efficient Market Price changes cannot be predicted. The price of the asset is equal to its fundamental (unobserved but true) value. Prices change due to the inflow of new information, and information flows randomly to the market. Therefore, price changes should be random and unpredictable. 6-15 SDUT Chen Gang Spring 2018