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EFFICIENT C PIT L
M RKETS
MIFTAH
MEUTHIA
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Efficient Capital Markets
Presented by Eugene Fama1970
EMH Has already revolutionized financialeconomic
Assertion is the idea that financial assetprices reflect all
relevant historical andcurrent information
EMH incorporate every piece offorecastable information into
unbiasedforecast of Future prices.
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A Description of Efficient Capital Markets
An efficient capital market is one in whichstock prices fully
reflect available information.
The EMH has implications for investors and
firms. Since information is reflected in security prices
quickly, knowing information when it is releaseddoes an investor
no good.
Firms should expect to receive the fair value forsecurities that
they sell. Firms cannot profit fromfooling investors in an
efficient market.
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Reaction of Stock Price to New Information in
Efficient and Inefficient Markets
Stock
Price
-30 -20 -10 0 +10 +20 +30
Days before (-) and after (+)
announcement
Efficient market response to
good news
Overreaction to good news
with reversion
Delayed response
to good news
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The Different Types of Efficiency
Weak Form
Security prices reflect all information found in pastprices and
volume.
Semi-Strong Form
Security prices reflect all publicly availableinformation.
Strong Form Security prices reflect all informationpublic
and
private.
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Weak Form Market Efficiency Security prices reflect all
information found in
past prices and volume.
Asset prices incorporate all historicalinformation
If the weak form of market efficiency holds,then technical
analysis is of no value.
Often weak-form efficiency is represented as
Pt
= Pt-1
+ Expected return + random errort
Since stock prices only respond to newinformation, which by
definition arrivesrandomly, stock prices are said to follow arandom
walk.
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StockPrice
Time
Investor behaviour tends to eliminate
cylycal Patterns
Sell
Sell
Buy
Buy
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Semi-Strong Form Market
Efficiency
Security prices reflect all publicly
availableinformation.
Publicly available information includes: Historical price and
volume information
Published accounting statements.
Information found in annual reports.
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Strong Form Market Efficiency
Security prices reflect all information
public and private.
Strong form efficiency incorporates weakand semi-strong form
efficiency.
Strong form efficiency says that anything
pertinent to the stock and known to atleast one investor is
already incorporated
into the securitysprice.
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All informationrelevant to a stock
Information setof publicly available
information
Relationship among Three Different Information
Sets
Informationset of
past prices
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The Behavioral Challenge to
Market Efficiency
Rationality
The behavioral view is not that all investor
are irrational
Independent Deviations From Rationality
Representativeness
Conservatism Arbitrage
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TERIMA KASIH
