ECON 1 Lecture Notes - Lecture 3: Chartism, Dividend Yield, Characters In The Echorium Sequence
Document Summary
Random walk: the notion that stock price changes are random and unpredictable. Efficient market hypothesis: prices of securities fully reflect available information about securities. Ordinary rates refer to rates of return commensurate with the risk of the stock. New information must be unpredictable, by definition -> stock change also unpredictable. Stock prices predictable -> markets are inefficient. In takeovers, acquiring firm pays a substantial premium over market price -> stock prices jump upwards! > but, no drift in prices after announcement date, suggesting no new information. Usually the market digests new within 5 minutes of the report! When information is costly to uncover, one would expect investment analysis calling for such expenditures to result in an increased expected return. Markets in emerging markets are less efficient than in markets of the u. s. due to less disclosure requirements. Small stocks also have less coverage -> might be undervalued.
