Efficient Market Hypothesis PDF

1 EFFICIENT MARKET HYPOTHESIS  2 STOCK MARKET IS LIKE A BEAUTY CONTEST! Anna Jobling Lisa Blackpink Emma Watson ©DrAF 2023  3 STOCK MARKET IS...

1 EFFICIENT MARKET HYPOTHESIS  2 STOCK MARKET IS LIKE A BEAUTY CONTEST! Anna Jobling Lisa Blackpink Emma Watson ©DrAF 2023  3 STOCK MARKET IS LIKE A BEAUTY CONTEST! HTTPS://FORMS.OFFICE.COM/ R/1HWJ5JKDF6 ©DrAF 2023  The concept was developed by John Maynard Keynes and introduced in Chapter 12 of his STOCK MARKET IS LIKE work, The General Theory of Employment, Interest and Money (1936), to explain price A BEAUTY CONTEST! fluctuations in equity markets. ©DrAF 2023 4 WITH ALL THE KNOWLEDGE 5 THAT WE OBTAINED, NOW LET’S GO AND BEAT THE MARKET!! Or can we? ©DrAF 2023  6 CAN WE PREDICT STOCK PRICE MOVEMENT ACCURATELY? You can try..but..umm ©DrAF 2023  CAN WE GET AN 7 ABNORMAL RETURN (ALPHA) FROM OUR PREDICTION CONSISTENTLY? HIGHLY UNLIKELY! ©DrAF 2023  8 BUT WHY? Because the market is efficient!! ©DrAF 2023  9 Developed by The Father of Modern Finance: Eugene Frank Fama (1965) It assumes that at any given time, prices MARKET fully reflect all available information about a particular stock and/or market. EFFICIENCY No investor has an advantage in predicting a return on a stock price because no one has access to information not already available to everyone else. Prices are moving randomly, no pattern ©DrAF 2023  10 MARKET IS EFFICIENT.. SO WHAT? No chance for No Cannot beat No pattern Alpha underpricing Equal chances the market asset Technical You don’t need No more Do not trade Invest in index Analysis is broker/fund whales and frequently fund useless manager sharks ©DrAF 2023  11 01 02 03 Provide Ideal market The idea of which benchmark of (without index fund and how market regulators) pension fund should operate operates WHY EMH IS IMPORTANT? ©DrAF 2023 PROMINENT SCHOLAR 12 IN FINANCE EUGENE F. FAMA “THE FATHER OF MODERN FINANCE” ❑ Born: February 14, 1939 ❑ Institution: University of Chicago, Booth School of Business ❑ Known for: EMH, Fama-French Three Factor Models, Event Study for Stock ❑ Award: Nobel Memorial Prize in Economics (2013) Trivial fact: Fama was originally considered for the Nobel Awards as early as the 1980s, but the committee was reluctant due to the confronted problem raise by non-other than Fama himself. ©DrAF 2023 13 TOO GOOD TO BE TRUE? ©DrAF 2023  Okay, we can’t beat the market. Can we at least beat the monkey? “A Random Walk 14 NOT QUITE!! Down Wall Street” Burton Malkiel (1973) An experiment conducted from 1964 until 2010 requires 100 monkeys throwing darts at stock pages every year. On average, 98 of 100 monkeys will pick a stock better than the human designed portfolio using weighted technique. Lucky? Genius? Is it better to let the monkey invest for us? ©DrAF 2023  15 TIMELINE OF MARKET EFFICIENCY Random Walk EMH Nobel Award Theory of Speculation (1863) Theory (1964) (1965-1970) (2013) First Burton Works by Worldwide mathematical Malkiel’s recognition. Eugene Fama model to book entitled Or is it? predict stock “ A Random Expanded price Walk Down movement Wall Street” into three forms ©DrAF 2023 WHAT MAKES THE MARKET EFFICIENT? Rational Random event Knowledge Information ©DrAF 2023 ©DrAF 2023 17  18 HOW IT WORKS? MONDAY 10am Monday 10am Monday 10.10am Price of KLK is RM30 (UNEXPECTED NEWS- (KNOWLEDGE) INFORMATION) Price of KLK should increase Unexpected positive news to RM35-RM40 on Tuesday (KLK announce Q2 profit 11am increase by 100%) Monday 11.00am (EMH) Monday 10.30am Place order (bid) at RM30 but (RATIONAL) COULD NOT BEAT THE not accepted Idea: buy today (RM30) and MARKET!! Asking Price is already at sell tomorrow (RM40) to get RM38 profit of RM10 per unit. ©DrAF 2023  LEVEL OF EMH 19 Weak Prices adjust quickly and form accurately according to Semi- the INFORMATION: Strong Past Information Strong Public information Private information ©DrAF 2023  20 WEAK FORM EMH SEMI-STRONG FORM EMH STRONG FORM EMH Past data could not predict future Public data could not be used to get Private data could not be used to stock movement abnormal return consistently get abnormal return consistently Test tool: Technical analysis and Test item: Insider trading historical data a)Public data such as dividend announcements or changes in BOD b) Event study analysis TEST OF EMH LEVEL ©DrAF 2023 ©DrAF 2023 21  22 DISCUSION IS IT REALISTIC? WHY IT MATTERS? WHAT IS THE EFFECT OF AI AND BIG DATA ON EMH? ©DrAF 2023  23 LinkedIn https://www.linkedin.com/i n/ahmad-fawwaz-mohd- nasarudin-060588162/ Facebook @fawwaz nasarudin Instagram dr.af_fawwaz Email [email protected] Phone 0195259995 23 SEMPRE MILAN ©DrAF 2023