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1、CHAPTER 11,The Efficient Market Hypothesis,11-2,Maurice Kendall (1953) found no predictable pattern in stock prices.Prices are as likely to go up as to go down on any particular day.How do we explain random stock price changes?,Efficient Market Hypothesis (EMH),11-3,Efficient Market Hypothesis (EMH)
2、,EMH says stock prices already reflect all available informationA forecast about favorable future performance leads to favorable current performance, as market participants rush to trade on new information.Result: Prices change until expected returns are exactly commensurate with risk.,11-4,Efficien
3、t Market Hypothesis (EMH),New information is unpredictable; if it could be predicted, then the prediction would be part of todays information.Stock prices that change in response to new (unpredictable) information also must move unpredictably.Stock price changes follow a random walk.,11-5,Figure 11.
4、1 Cumulative Abnormal Returns Before Takeover Attempts: Target Companies,11-6,Figure 11.2 Stock Price Reaction to CNBC Reports,11-7,Information: The most precious commodity on Wall Street Strong competition assures prices reflect information.Information-gathering is motivated by desire for higher in
5、vestment returns.The marginal return on research activity may be so small that only managers of the largest portfolios will find them worth pursuing.,EMH and Competition,11-8,WeakSemi-strongStrong,Versions of the EMH,11-9,Technical Analysis - using prices and volume information to predict future pri
6、cesSuccess depends on a sluggish response of stock prices to fundamental supply-and-demand factors.Weak form efficiencyRelative strengthResistance levels,Types of Stock Analysis,11-10,Types of Stock Analysis,Fundamental Analysis - using economic and accounting information to predict stock pricesTry
7、to find firms that are better than everyone elses estimate.Try to find poorly run firms that are not as bad as the market thinks.Semi strong form efficiency and fundamental analysis,11-11,Active ManagementAn expensive strategySuitable only for very large portfoliosPassive Management: No attempt to o
8、utsmart the marketAccept EMHIndex Funds and ETFsVery low costs,Active or Passive Management,11-12,Even if the market is efficient a role exists for portfolio management:DiversificationAppropriate risk levelTax considerations,Market Efficiency & Portfolio Management,11-13,Resource Allocation,If marke
9、ts were inefficient, resources would be systematically misallocated.Firm with overvalued securities can raise capital too cheaply.Firm with undervalued securities may have to pass up profitable opportunities because cost of capital is too high.Efficient market perfect foresight market,11-14,Empirica
10、l financial research enables us to assess the impact of a particular event on a firms stock price.The abnormal return due to the event is the difference between the stocks actual return and a proxy for the stocks return in the absence of the event.,Event Studies,11-15,Returns are adjusted to determi
11、ne if they are abnormal.Market Model approach:a. rt = a + brmt + et(Expected Return)b. Excess Return = (Actual - Expected)et = rt - (a + brMt),How Tests Are Structured,11-16,Magnitude IssueOnly managers of large portfolios can earn enough trading profits to make the exploitation of minor mispricing
12、worth the effort.Selection Bias IssueOnly unsuccessful investment schemes are made public; good schemes remain private.Lucky Event Issue,Are Markets Efficient?,11-17,Weak-Form Tests,Returns over the Short HorizonMomentum: Good or bad recent performance continues over short to intermediate time horiz
13、onsReturns over Long HorizonsEpisodes of overshooting followed by correction,11-18,Predictors of Broad Market Returns,Fama and FrenchAggregate returns are higher with higher dividend ratiosCampbell and ShillerEarnings yield can predict market returnsKeim and StambaughBond spreads can predict market
14、returns,11-19,P/E EffectSmall Firm Effect (January Effect)Neglected Firm Effect and Liquidity EffectsBook-to-Market RatiosPost-Earnings Announcement Price Drift,Semistrong Tests: Anomalies,11-20,Figure 11.3 Average Annual Return for 10 Size-Based Portfolios, 1926 2008,11-21,Figure 11.4 Average Retur
15、n as a Function of Book-To-Market Ratio, 19262008,11-22,Figure 11.5 Cumulative Abnormal Returns in Response to Earnings Announcements,11-23,Strong-Form Tests: Inside Information,The ability of insiders to trade profitability in their own stock has been documented in studies by Jaffe, Seyhun, Givoly,
16、 and PalmonSEC requires all insiders to register their trading activity,11-24,Interpreting the Anomalies,The most puzzling anomalies are price-earnings, small-firm, market-to-book, momentum, and long-term reversal.Fama and French argue that these effects can be explained by risk premiums.Lakonishok,
17、 Shleifer, and Vishney argue that these effects are evidence of inefficient markets.,11-25,Figure 11.6 Returns to Style Portfolio as a Predictor of GDP Growth,11-26,Interpreting the Evidence,Anomalies or data mining?Some anomalies have disappeared.Book-to-market, size, and momentum may be real anoma
18、lies.,11-27,Interpreting the Evidence,Bubbles and market efficiencyPrices appear to differ from intrinsic values.Rapid run up followed by crashBubbles are difficult to predict and exploit.,11-28,Stock Market Analysts,Some analysts may add value, but:Difficult to separate effects of new information f
19、rom changes in investor demandFindings may lead to investing strategies that are too expensive to exploit,11-29,Mutual Fund Performance,The conventional performance benchmark today is a four-factor model, which employs:the three Fama-French factors (the return on the market index, and returns to por
20、tfolios based on size and book-to-market ratio) plus a momentum factor (a portfolio constructed based on prior-year stock return).,11-30,Figure 11.7 Estimates of Individual Mutual Fund Alphas, 1993 - 2007,11-31,Consistency, the “hot hands” phenomenonCarhart weak evidence of persistencyBollen and Bus
21、se support for performance persistence over short time horizonsBerk and Green skilled managers will attract new funds until the costs of managing those extra funds drive alphas down to zero.,Mutual Fund Performance,11-32,Figure 11.8 Risk-adjusted performance in ranking quarter and following quarter,11-33,So, Are Markets Efficient?,The performance of professional managers is broadly consistent with market efficiency.Most managers do not do better than the passive strategy.There are, however, some notable superstars:Peter Lynch, Warren Buffett, John Templeton, George Soros,
