1 Efficient Market Hypothesis vs. Behavioral Finance Market Efficiency Random walk versus market efficiency Versions of market efficiency Technical analysis vs. fundamental analysis Predictors of future returns and market anomalies Behavioral finance Market Efficiency and Behavioral Finance
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Efficient Market Hypothesis vs. Behavioral Finance
Efficient Market Hypothesis vs. Behavioral Finance. Market Efficiency Random walk versus market efficiency Versions of market efficiency Technical analysis vs. fundamental analysis Predictors of future returns and market anomalies Behavioral finance. - PowerPoint PPT Presentation
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Efficient Market Hypothesis vs. Behavioral Finance
Market Efficiency Random walk versus market efficiency Versions of market efficiency Technical analysis vs. fundamental analysis Predictors of future returns and market anomalies Behavioral finance
Market Efficiency and Behavioral Finance
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Cumulative Abnormal Returns Around Takeover Attempts: Target Companies
Market Efficiency and Behavioral Finance
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Stock Price Reaction to CNBC Reports
Market Efficiency and Behavioral Finance
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Stock prices fully and accurately reflect publicly available information.
Once information becomes available, market participants analyze it.
Competition assures prices reflect information. What does competition mean here? -- page 351 Is there a role for active portfolio management in
an efficient market?
EMH and Competition
Market Efficiency and Behavioral Finance
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Weak Semi-strong Strong
See page 347-348.
Forms of the EMH
Market Efficiency and Behavioral Finance
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Technical Analysis - using prices and volume information to predict future prices. Weak form efficiency & technical analysis Chartist Relative strength versus resistance levels
Fundamental Analysis - using economic and accounting information to predict stock prices. Semi strong form efficiency & fundamental analysis
Types of Stock Analysis
Market Efficiency and Behavioral Finance
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Technical Analysis
Relative strength – page 348 Resistance levels – upper bound or Support levels – lower bound Whether a workable technical trading rule will
continue to work in the future once it becomes publicly known?
Market Efficiency and Behavioral Finance
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Fundamental Analysis
Uses earnings and dividend prospects of the firm, expectations of future interest rates, and risk evaluation of the firm to determine proper stock prices.
Fundamental analysis is much beyond identifying well-run firms with good prospects. It is to identify companies better than every else’s estimate.
Market Efficiency and Behavioral Finance
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Active Management Security analysis Timing
Passive Management Buy and Hold Index Funds
Active or Passive Management
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Even if the market is efficient a role exists for portfolio management:
Appropriate risk level Tax considerations Other considerations
Market Efficiency & Portfolio Management
Market Efficiency and Behavioral Finance
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Event studies Assessing performance of professional managers Testing some trading rule
Empirical Tests of Market Efficiency
Market Efficiency and Behavioral Finance
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Magnitude Issue Selection Bias Issue: investing in small stocks Lucky Event Issue
Issues in Examining the Results
Market Efficiency and Behavioral Finance
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Weak-Form Tests
Serial Correlation Momentum Returns over Long Horizons
Market Efficiency and Behavioral Finance
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Experience with 911 Anticipating market chaos, panic selling and a disastrous loss of value in the wake of the attacks,
the NYSE and the Nasdaq remained closed until September 17, the longest shutdown since 1933. Moreover, many trading, brokerage and other financial firms had offices in the World Trade Center and were unable to function in the wake of the tragic loss of life and collapse of both towers.
On the first day of NYSE trading after 9/11, the market fell 684 points, a 7.1% decline, setting a record for the biggest loss in exchange history for one trading day. At the close of trading that Friday, ending a week that saw the biggest losses in NYSE history, the Dow Jones was down almost 1,370 points, representing a loss of over 14%.
Major stock sell-offs hit the airline and insurance sectors as anticipated when trading resumed. Hardest hit were American Airlines and United Airlines, carriers whose planes were hijacked for the terrorist attacks.
American Airlines (NYSE:AMR) stock dropped from a $29.70 per share close of September 11 to $18.00 per share close on September 17, a 39% decline. United Airlines (NYSE:UAL) stock dropped from $30.82 per share close to $17.50 per share on the close on September 17, a 42% decline.
Also: Program trading; algorithmic trading; and high-frequency trading:According to the New York Stock Exchange, in 2006 program trading accounts for about 30% and as high as 46.4% of the trading volume on that exchange every day.http://www.programtrading.com/The greatest point loss of the Dow Jones Industrial Average was 777.68 points on September 29, 2008.