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  • Versions of The EMH: PGP17 Day 8

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    Kumar Prashant
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    The document discusses different versions of the efficient market hypothesis (EMH). It defines the weak, semi-strong, and strong forms of EMH and provides examples of evidence for and against EMH. The EMH states that stock prices already reflect all available public and private information, so it is impossible to "beat the market" consistently on the basis of this information. The document also discusses technical analysis, dollar cost averaging, and problems with EMH.

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    The document discusses different versions of the efficient market hypothesis (EMH). It defines the weak, semi-strong, and strong forms of EMH and provides examples of evidence for and against EMH. The EMH states that stock prices already reflect all available public and private information, so it is impossible to "beat the market" consistently on the basis of this information. The document also discusses technical analysis, dollar cost averaging, and problems with EMH.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    10 views5 pages

    Versions of The EMH: PGP17 Day 8

    Uploaded by

    Kumar Prashant
    The document discusses different versions of the efficient market hypothesis (EMH). It defines the weak, semi-strong, and strong forms of EMH and provides examples of evidence for and against EMH. The EMH states that stock prices already reflect all available public and private information, so it is impossible to "beat the market" consistently on the basis of this information. The document also discusses technical analysis, dollar cost averaging, and problems with EMH.

    Copyright:

    © All Rights Reserved
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    of 5

    10/8/2014

    1
    IAPM
    PGP17
    1
    Day8
    VersionsoftheEMH
    Weakform Weakform
    Prices reflect all information that can be deived by studying
    market trading data, such as past prices, volume etc.
    Semistrongform
    Prices reflect all publicly available information (including
    market trading data) regarding the prospects of the firm
    Strong
    All public and private information is reflected in current prices
    2
    10/8/2014
    2
    Somecommonevidences
    Insidersearnabnormaltradingprofits Insidersearnabnormaltradingprofits
    EveryJan,thestockmarketearnsabnormalreturns
    Over25%ofmutualfundsoutperformthemarketon
    average
    3
    AlittlebitofhistorybehindEMH
    MauriceKendall(1953)foundnopredictablepattern MauriceKendall(1953)foundnopredictablepattern
    instockprices.
    Pricesareaslikelytogoupastogodownonany
    particularday.
    Howdoweexplainrandomstockpricechanges?
    4
    10/8/2014
    3
    EfficientMarketHypothesis
    EMHsaysstockpricesalreadyreflectallavailable EMHsaysstockpricesalreadyreflectallavailable
    information
    Aforecastaboutfavorablefuture performanceleadsto
    favorablecurrent performance,asmarketparticipants
    rushtotradeonnewinformation.
    Result: Prices change until expected returns are exactly
    i h i k commensurate with risk.
    5
    Newinformationisunpredictable;ifitcouldbe Newinformationisunpredictable;ifitcouldbe
    predicted,thenthepredictionwouldbepartoftodays
    information.
    Upshot:Stockpricesthatchangeinresponsetonew
    (unpredictable)informationalsomustmove
    unpredictably.
    Logic behind randomness
    Stockpricechangesfollowarandomwalk.
    6
    10/8/2014
    4
    TechnicalAnalysis usingpricesandvolume TechnicalAnalysis usingpricesandvolume
    informationtopredictfutureprices
    Runstest:Oneoftheearliesttestsformarket
    efficiency
    7
    Dollarcostaveraging
    Thisisastrategywherebyyoubuyequalrupee Thisisastrategywherebyyoubuyequalrupee
    amountsofastockeveryperiod,e.g.sayRs.1000p.m.
    Whenthestockpriceislow,yourfixedmonthly
    purchasewillbuymoresharesandviceversa
    Averagingovertime,youwillbuymoreshareswhen
    thestockischeaperandlesswhenitisrelatively
    expensive
    HowdoesitrelatetoEMH?
    8
    10/8/2014
    5
    Problems
    Ch11:P11P15,P17 Ch11:P11 P15,P17
    (Warning)
    9

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