Efficient Capital Markets

Market efficiency is based on the following set of assumptions:

1. A large number of profit maximizing participants are analyzing and valuing securities independent of each other.
2. New information comes to the market in a random fashion, and new announcements are independent of each other in regard to timing.
3. Investors adjust their estimates of security prices rapidly to reflect their interpretation of the new information received.
4. Expected returns implicitly include risk in the price of the security.

3 forms of Efficient Market Hypothesis (EMH)

Weak-form efficient markets
Semistrong efficient markets
Strong-form efficient markets

Weaks-Form Tests of the EMH

Statisitical tests for independence
Autocorrelation tests
Runs tests
Trading rule tests
考察三天期张，三天期降的趋势

Semi-storng Tests of the EMH

Return prediction studies
Time-series tests
Event studies
Cross-sectional tests 截面检验

Strong Form Tests of EMH

Insider trading
Exchange specialists
Security analysis
Professional money managers

Documented market anomalies:
1. Earings surprises to predict returns
2. Calendar studies 年底股价高，12月底到1月初股价低
3. Price-earnings ratio (P/E)
4. Small firm effect
5. The neglected firms effect
6. Book value/market value --semi-strong EMH

Overall Conclusion About the EMH

the results support the weak-form of the EMH
Event studies support semistorng EMH but time-series and cross-sectional tests do not support
Insider/specialist tests support the strong form of the EMH

IMPLICATIONS OF EFFICIENT MARKETS

Protfolio managers should help:
1. quantify their clients' risk tolerances and return needs within the bounds of the client's liquidity, income, time horizon, and legal and regulatory constraints.
2. Verbalize their clients' portfolio policies and strategies needed to meet the client's needs, then construct an optimal portfolio by allocating funds between financial and real assets. This is referred to as asset allocation.
3. Diversify their clients' portfolio (on a global basis) to eliminate unsystematic costs.
4. Monitor and evaluate changing capital market expectatinons as they affect the risk/return expectations of the assets in the client's portfolio.
5. Monitor their clients' needs and circumstances.
6. Rebalance their clients' portfolios when changes are necessary.

Peformance Measurement

Money Managers
分离好的和坏的股票

The rationale for investing in index funds
指数基金的功能是分享总体上涨

Behavior Finance

Overconfidence Bias
Confirmation Bias
Escalation Bias