Tài chính doanh nghiệp - Chapter 12: Market efficiency and behavioral finance

Chapter 12Market Efficiency and Behavioral FinanceDo security prices reflect information ?Why look at market efficiency?Implications for business and corporate financeImplications for investmentEfficient Market Hypothesis (EMH)Random Walk - stock prices are randomActually submartingaleExpected price is positive over timePositive trend and random about the trendRandom Walk and the EMHRandom Walk with Positive TrendSecurity PricesTimeWhy are price changes random?Prices react to informationFlow of information is randomTherefore, price changes are randomRandom Price ChangesStock prices fully and accurately reflect publicly available information.Once information becomes available, market participants analyze it.Competition assures prices reflect information.EMH and Competition Weak Semi-strong StrongForms of the EMHTechnical Analysis - using prices and volume information to predict future prices.Weak form efficiency & technical analysisFundamental Analysis - using economic and accounting information to predict stock prices.Semi strong form efficiency & fundamental analysisTypes of Stock AnalysisActive ManagementSecurity analysisTimingPassive ManagementBuy and HoldIndex FundsActive or Passive ManagementEven if the market is efficient a role exists for portfolio management:Appropriate risk levelTax considerationsOther considerationsMarket Efficiency & Portfolio ManagementEvent studiesAssessing performance of professional managersTesting some trading ruleEmpirical Tests of Market Efficiency1. Examine prices and returns over timeHow Tests Are StructuredReturns Over Time0+t-tAnnouncement Date2. Returns are adjusted to determine if they are abnormal.Market Model approacha. Rt = at + btRmt + et (Expected Return)b. Excess Return = (Actual - Expected) et = Actual - (at + btRmt)How Tests Are Structured (cont’d)2. Returns are adjusted to determine if they are abnormal.Market Model approachc. Cumulate the excess returns over time:0+t-tHow Tests Are Structured (cont’d)Magnitude IssueSelection Bias IssueLucky Event IssuePossible Model MisspecificationIssues in Examining the ResultsTechnical AnalysisShort horizonLong horizonFundamental AnalysisAnomalies ExistWhat Does the Evidence Show?Small Firm Effect (January Effect)Neglected FirmMarket to Book RatiosReversalsPost-Earnings Announcement DriftAnomaliesExplanations of AnomaliesMay be risk premiumsBehavioral ExplanationsInformation Processing ErrorsBehavioral BiasesLimits to ArbitrageInformation ProcessingForecasting ErrorsOverconfidenceConservatismSample Neglect and RepresentativenessBehavioral BiasesFramingMental AccountingRegret AvoidanceLimits to ArbitrageFundamental RiskImplementation CostsModel RiskSome evidence of persistent positive and negative performance.Potential measurement error for benchmark returns.Style changesMay be risk premiumsSuperstar phenomenon Mutual Fund Performance