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The Efficient Market Hypothesis

The Efficient Market Hypothesis. Chapter 11. Random Walks and The Efficient Market Hypothesis.

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The Efficient Market Hypothesis

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  1. The Efficient Market Hypothesis Chapter 11 Bodi Kane Marcus Ch 5

  2. Bodi Kane Marcus Ch 5 Random Walks and The Efficient Market Hypothesis • Random Walks : The theory that stock price changes have the same distribution and are independent of each other, so the past movement or trend of a stock price or market cannot be used to predict its future movement.

  3. Bodi Kane Marcus Ch 5 Random Walks and The Efficient Market Hypothesis • The Efficient Market Hypothesis: An investment theory that states it is impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. 

  4. Bodi Kane Marcus Ch 5

  5. Bodi Kane Marcus Ch 5 Random Walks and The Efficient Market Hypothesis • Competition as the source of efficiency • Versions of the efficient market hypothesis • Weak form EMH • Semi strong EMH • Strong form EMH

  6. Bodi Kane Marcus Ch 5 Implication of the EMH • Technical analysis • Fundamental analysis • Active versus passive portfolio management

  7. Bodi Kane Marcus Ch 5 Implication of the EMH • Technical analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. • Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

  8. Bodi Kane Marcus Ch 5 Implication of the EMH • Fundamental analysis : A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. • Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors and individually specific factors.

  9. Bodi Kane Marcus Ch 5 Implication of the EMH • Active versus passive portfolio management • Active asset management is based on a belief that a specific style of management or analysis can produce returns that beat the market • Passive asset management is based on the belief that: Markets are efficient, Market returns, cannot be surpassed regularly over time, Low-cost investments held for the long-term will provide the best returns.

  10. Bodi Kane Marcus Ch 5 Event studies • An empirical study performed on a security that has experienced a significant catalyst occurrence, and has subsequently changed dramatically in value as a result of that catalyst. The event can have either a positive or negative effect on the value of the security.

  11. Bodi Kane Marcus Ch 5 StudiEmpirik Event Study di Indonesia • Pengaruhpengumuman merger danakuisisi (AnggrainiKurniawan, 2001) • Analisapengaruhlebaransebagaibentukanomalipadapasar saham di bursa efekjakarta (event study peristiwalebarantahun 2001, DwiNurIndahsari, 2002) • Reaksipasar modal indonesiaterhadapperistiwapolitikdalamnegeri (event study : peristiwapelantikan Megawati SoekarnoputrisebagaiPresiden RI ke-5) (ElizabethAlim, 2002) • Pengaruhpengumuman right issue terhadapkinerja perusahaan dan abnormal return serta volume perdagangan saham (event study terhadap-perusahaan manufaktur yang listing di Bursa Efek Jakarta (DanielWibisono, 2003)

  12. Bodi Kane Marcus Ch 5 StudiEmpirik Event Study di Indonesia • Reaksipasarterhadappublikasilaporankeuangan (event study pada perusahaan non manufaktur yang terdaftardi BEJ tahun 2004-2006 (Siswojo, Ivana M, 2007) • Reaksi pasar terhadap publikasi laporan keuangan (event study pada perusahaan manufaktur yang terdaftar di BEJ tahun 2004-2006) (Thedja, Caroline, 2007) • Analisaperbedaan abnormal return dan trading volume activity sebelumdansesudahpemilu 1999 dan 2004 (analisapadaemitmen yang tergolong lq-45 padaperiode 1999 dan 2004) (Wibowo, NurCahyo, 2009)

  13. Bodi Kane Marcus Ch 5 StudiEmpirik Event Study di Indonesia • Analisis January effect pada IHSG, indeks LQ45, dan saham individual (studikasusterhadap 34 saham yang diperdagangkanperiode 1997-2002 (Fitriani, Alexandra, 2003) • Analisisterjadinyajanuary effect danpengaruhnyaterhadap return obligasikorporasidi bursa efek Surabaya tahun 2003 (Caroline, Nesia, 2005) • Pengujian day-of-the-week effect pada bursa efek Jakarta periode 1 Juli 1997-31 Juli 1998 (Helen, 1999)

  14. Bodi Kane Marcus Ch 5 Are market Efficient ? • The issues • The magnitude issue • The selection bias issue • The lucky event issue

  15. Bodi Kane Marcus Ch 5 Weak form tests: Patterns in stock returns • Returns over short horizons • Returns over long horizons

  16. Bodi Kane Marcus Ch 5 Semi strong tests: Market anomalies • The small firm in January effects • The neglected firm effect and liquidity effect • Book to market ratios • Post-earnings announcements price drift

  17. Bodi Kane Marcus Ch 5 Semi strong tests: Market anomalies • The small firm in January effects

  18. Bodi Kane Marcus Ch 5 Semi strong tests: Market anomalies • The neglected firm effect and liquidity effect • Neglected firms are usually the smaller firms that analysts tend to ignore. • Information available on these smaller companies tends to be limited to those items that are required by law, such as the 10-K. Blue-chip firms, on the other hand, have a higher profile, which provides large amounts of high quality information (to institutional investors such as pension or mutual fund companies.

  19. Bodi Kane Marcus Ch 5 Semi strong tests: Market anomalies • Book to market ratios

  20. Bodi Kane Marcus Ch 5 Semi strong tests: Market anomalies • Post-earnings announcements price drift

  21. Bodi Kane Marcus Ch 5 Semi strong tests: Market anomalies

  22. Bodi Kane Marcus Ch 5 Strong form tests: • Inside information • Interpreting the evidence • Mutual fund and analyst performance Risk premiums or inefficiencies • Anomalies or data mining

  23. Bodi Kane Marcus Ch 5 Strong form tests: • Inside information • Interpreting the evidence • Mutual fund and analyst performance Risk premiums or inefficiencies • Anomalies or data mining

  24. Bodi Kane Marcus Ch 5 Strong form tests: • Inside information • Interpreting the evidence

  25. Bodi Kane Marcus Ch 5 Strong form tests: • Mutual fund and analyst performance Risk premiums or inefficiencies • Anomalies or data mining

  26. Bodi Kane Marcus Ch 5 The Noisy market hypothesis and fundamental indexing • Noisy Market Hypothesis contrasts the efficient market hypothesis in that it claims that the prices of securities are not always the best estimate of the true underlying value of the firm. It argues that prices can be influenced by speculators and momentum traders, as well as by insiders and institutions that often buy and sell stocks for reasons unrelated to fundamental value, such as for diversification, liquidity and taxes

  27. Bodi Kane Marcus Ch 5 The Noisy market hypothesis and fundamental indexing • Fundamentally based indexes are indices in which stocks are weighted by one of many economic fundamental factors, especially accounting figures which are commonly used when performing corporate valuation, or by a composite of several fundamental factors

  28. Bodi Kane Marcus Ch 5 Mutual fund and analyst performance • Stock market analyst

  29. Bodi Kane Marcus Ch 5 Mutual fund and analyst performance • Mutual Fund Managers

  30. Bodi Kane Marcus Ch 5 Mutual fund and analyst performance • Mutual Fund Managers

  31. Bodi Kane Marcus Ch 5 Mutual fund and analyst performance • Stock market analyst • Survivorship bias in mutual fund studies • The managers who perform well in one period tend to be above average performers in subsequent periods • Empirical studies: 600 managers in mutual fund company (Tab 11.2)

  32. Bodi Kane Marcus Ch 5 Mutual fund and analyst performance • So, are markets efficient? • Markets are very efficient, but that rewards to the especially diligent, intelligent, or creative may in fact be waiting • (Pasarsangatefisien, tetapiimbalanmasihtetapmenunggubagimereka yang paling rajin, cerdasataukreatif )

  33. Bodi Kane Marcus Ch 5 Tugas Kelompok

  34. Bodi Kane Marcus Ch 5 Reksadana Manulife • Manulife Dana PasarUang • Manulife Dana PasarUangSyariah • Manulife PendapatanTetap Dollar (Rp) • Manulife PendapatanTetap Dollar (USD) • Manulife Dana Ekuitas • Manulife Dana EkuitasSyariah • Manulife Dana BerimbangSyariah • Manulife Dana Berimbang • Manulife PendapatanTetapKorporasi • Manulife PendapatanTetap Negara • Manulife Dana Ekuitas Indonesia - China (Rp) • Manulife Dana Ekuitas Indonesia - China (USD) • Fund Fact Sheet • http://www.manulife-indonesia.com/Front/FFS.htm

  35. Bodi Kane Marcus Ch 5

  36. Bodi Kane Marcus Ch 5

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