[经济学]lecture06 Market Efficiency and Behavioral Finance.pptVIP

Financial Management Lecture 6 Market Efficiency and Behavioral Finance Contents Market efficiency Empirical evidence Psychology Limits to arbitrage Behavioral explanation Overview In a crowded supermarket, you get frustrated by the long queue. But it seems that on average, you are not better off by actively searching for the shortest queue. If you happen to be in a short queue, you are super lucky, or super smart, or have spent a great deal of efforts. This is basically what efficient market hypothesis (EMH) is talking about! Market efficiency In an efficient market, price always reflects all available information This means: market price = intrinsic value price reacts to new information quickly with no biases all investment strategies can only get zero abnormal return stock price is random (because information flow is random) Three forms of market efficiency Weak form: price reflects all past information Semi-strong form: price reflects all public information Strong form: price reflects all information available to anyone Why is the market efficient? Rational investors: if investors are rational, they will form price according to their information Random transaction: transactions between investors are random, so the impact of irrational investors will be cancelled out Arbitrage: arbitrage will smooth out the impact of irrational investors Luck or capability? Toss the coin 20 times, about 1 in 1 million people will always get the same side. If annual expected return is 15%, and standard deviation is 10%, then 5 out of 200 investors will get a return above 35%. Blind monkey play darts. (Guess who Warren Buffet is….) Even a broken clock is right twice a day! Evidence of the weak form If price reflects all past information, then we cannot use past return or other past variables to predict future return In fact, stock price is random. How investor behavior could smooth away any price pattern Evidence of the semi-strong form The semi-strong form of mar