FINA 469 Lecture Notes - Lecture 10: Efficient-Market Hypothesis, Insider Trading, Capital Asset Pricing Model
23 Mar 2017
Department
Course
Professor
Document Summary
Stock price changes are random (can"t be predicted, still has reason) Ideas may seem contradictory, but actually are not inconsistent. Not every individual knows every piece of information, when trading the security they collectively drive it to its real value. When there is surprise information, it is immediately absorbed and reflected in the new stock price. Returns may appear to change randomly, but behavior may also be interpreted as information reaching market participants. Investor competition should imply stock prices reflect available information. Since multiple analysts, hedge funds, etc. , are digging for info, emh assumes this competition extracts that data from the market and flows into the stock price. Weak form: stock prices already reflect all information contained in the history of trading (past prices, short interest, trends) Semi-strong form: stock prices already reflect all public information (past prices, financial statements, strategy) Strong from: stock prices already reflect all relevant information, including inside information.
