96金融市场6theory of efficient capital market

Slide#6-1ChapterSixTHETHEORYOFEFFICIENTCAPITALMARKETSPartIIPrinciplesofFinancialMarketsSchoolofManagementinHUSTSlide#6-2ChapterOutlineTheoryofRationalExpectationsEfficientMarketsTheorySchoolofManagementinHUSTSlide#6-3TheoryofRationalExpectationsExample:SupposethatwhenJoetravelswhenitisnotrushhour,ittakesaverageof30minutesforhistriptowork.Sometimesittakeshim35minutes,othertimes25minutes,buttheaveragenot-rush-hourdrivingtimeis30minutes.If,howeverJoeleavesforwokduringtherushhour,ittakeshim,onaverage,anadditional10minutestowok.Giventhathisexpectationarerational,whatshouldJoeexpecthisdrivingtimetobe?SchoolofManagementinHUSTSlide#6-4TheoryofRationalExpectationsRationalexpectation(RE)=expectationthatisoptimalforecast(bestpredictionoffuture)usingallavailableinformation:i.e.,RE⇒Xe=XofRationalexpectation,althoughoptimalprediction,maynotbeaccurate2reasonsexpectationmaynotberational1.Notbestprediction2.NotuseavailableinformationSchoolofManagementinHUSTSlide#6-5Implications:1.Changeinwayvariablemoves,wayexpectationsformedchanges2.Forecasterrorsonaverage=0andarenotpredictableTheoryofRationalExpectationsRationalexpectationsmakessensebecauseiscostlynottohaveoptimalforecastSchoolofManagementinHUSTSlide#6-6EfficientMarketHypothesis:RationalExpectationsAppliedtoFinancialMarketsEfficientMarketHypothesis:RationalExpectationsAppliedtoFinancialMarketsEfficientMarketsHypothesisWhenfinancialmarketsareinequilibrium,pricesoffinancialinstrumentsreflectallreadilyavailableinformationExpectationsinthefinancialmarketsareequaltooptimalforecastsusingallavailableinformationSchoolofManagementinHUSTSlide#6-7EfficientMarketsTheorytt1tPCPPRET+-=+tte1tePCPPRET+-=+SchoolofManagementinHUSTSlide#6-8EfficientMarketsTheoryRationalExpectationsimplies:Pet+1=Poft+1⇒RETe=RETof(1)MarketequilibriumRETe=RET*(2)Put(1)and(2)together:EfficientMarketsTheoryRETof=RET*SchoolofManagementinHUSTSlide#6-9EfficientMarketsTheoryCurrentpricesinafinancialmarketwillbesetsothattheoptimalforecastofasecurity’sreturnusingallavailableinformationequalsthesecurity’sequilibriumreturn.Asecurity’spricefullyreflectsallavailableinformationinanefficientmarket.SchoolofManagementinHUSTSlide#6-10WhyEfficientMarketsTheorymakessenseIfRETofRET*⇒Pt↑,RETof↓IfRETofRET*⇒Pt↓,RETof↑untilRETof=RET*1.Allunexploitedprofitopportunitieseliminated2.EfficientMarketsholdsevenifareuninformed,irrationalparticipantsinmarketEfficientMarketsTheorySchoolofManagementinHUSTSlide#6-11EfficientMarketHypothesisEfficientMarketHypothesisStrongerVersionofEfficientMarketHypothesisTheorythatpricesofallfinancialinstruments:—Reflectoptimalforecastoffinancialinstrument—ReflecttruefundamentalvalueoftheinstrumentSchoolofManagementinHUSTSlide#6-12EfficientMarketHypothesis:RationalExpectationsAppliedtoFinancialMarketsEfficientMarketHypothesis:RationalExpectationsAppliedtoFinancialMarketsMarketFundamentalsFactorshavedirecteffectonfutureincomestreamsofinstruments,including:—Valueoftheassets—ExpectedincomestreamsofthoseassetsonwhichfinancialinstrumentsrepresentclaimsSchoolofManagementinHUSTSlide#6-13EvidenceonEfficientMarketsTheoryFavorableEvidence1.Investmentanalystsandmutualfundsdon'tbeatthemarket2.Stockpricesreflectpubliclyavailableinfo:anticipatedannouncementsdon'taffectstockprice3.Stockpricesandexchangeratesclosetorandomwalk.IfpredictionsofΔPbig,RETofRET*⇒predictionsofΔPsmall4.TechnicalanalysisdoesnotoutperformmarketSchoolofManagementinHUSTSlide#6-14UnfavorableEvidence1.Small-firmeffect:smallfirmshaveabnormallyhighreturns2.Januaryeffect:highreturnsinJanuary3.Marketoverreaction4.Excessivevolatility5.MeanreversionOverviewReasonablestartingpointbutnotwholestoryEvidenceonEfficientMarketsTheorySchoolofManagementinHUSTSlide#6-15ImplicationsforInvesting1.Publishedreportsoffinancialanalystsnotveryvaluable2.Shouldbeskepticalofhottips3.Stockpricesmayfallongoodnews4.Prescriptionforinvestor1.Shouldn'ttrytooutguessmarket2.Therefore,buyandhold3.Diversifywithno-loadmutualfundSchoolofManagementinHUSTSlide#6-16ImplicationsforInvestingEvidenceonRationalExpectationsinOtherMarkets1.Bondmarketsappearefficient2.EvidencewithsurveydataismixedSkepticismaboutqualityofdata3.Followingimplicationissupported:changeinwayvariablemoves,wayexpectationsareformedchangesSchoolofManagementinHUSTSlide#6-17THEEND!SchoolofManagementinHUSTSlide#6-18SchoolofManagementinHUSTSlide#6-19.SchoolofManagementinHUSTSlide#6-20SchoolofManagementinHUSTSlide#6-21SchoolofManagementinHUSTSlide#6-22SchoolofManagementinHUSTSlide#6-23,SchoolofManagementinHUSTSlide#6-24SchoolofManagementinHUSTSlide#6-25SchoolofManagementinHUSTSlide#6-26SchoolofManagementinHUSTSlide#6-27tttSSε=--1lnlntε0)|(1=-ttIEεSchoolofManagementinHUSTSlide#6-28ttttSSεμ+=--1lnln0)|(1=-ttIEεSchoolofManagementinHUSTSlide#6-291210SchoolofManagementinHUSTSlide#6-30SchoolofManagementinHUSTSlide#6-31SchoolofManagementinHUSTSlide#6-321SchoolofManagementinHUSTSlide#6-33SchoolofManagementinHUSTSlide#6-34Campbell12SchoolofManagementinHUSTSlide#6-35SchoolofManagementinHUSTSlide#6-36SchoolofManagementinHUSTSlide#6-37SchoolofM