FIN 010 Lecture Notes - Lecture 26: Santa Barbara City College, Autocorrelation, Efficient-Market Hypothesis
Document Summary
Determination of ps: ps respond to changes in expectations (arise from new info) Two components of efficiency: informational efficiency (speed of incorporation, market rationality (correctly incorporated) Efficient markets: new info incorporated into ps instantaneous and unbiased, Info set cannot be consistently used to earn excess returns. Prices change until e(r) are exactly commensurate w/ risk. New info = unpredictable (then would be part of todays info) Thus stock ps are unpredictable bc info is unpredictable. Marginal return on research activity may only be small -> only large portfolios find them worth pursuing (eos?) In efficient market: mc of obtaining and acting on info should not > marginal benefit from such actions. Inefficiencies that are not econ exploitable can still be consistent w/ efficient market. If markets are inefficient = r are systematically misallocated. Firms with overvalued securities can raise capital too cheaply. Firms with undervalued securities may have to pass profitable opp bc cost of cap too high.