§ Introduction
o A random walk down the wall street publish by Prof. Burton
o It seems say that the price in the money market are not systematically predictable
o Underpinning the argument → most fundamental tenets of finance → market are efficient → they are rationally and accurately reflect all publicly available information
o There still a lot of controversy about the Efficient Market Hypothesis or EMH
o Burton Believes that monetarism worked well → there is a strong relation between economic quantity and the quantity of money
o But this EMH concept has been extensively analyzed and has meet the test of time extraordinary well
o Even in weekend effect and January effect does not held up but most of part can be handled by this hypothesis theory
o In the past 30 years people believes that EMH is perfect
o Nowadays some expertise has been realized that a lot of Unsystematic Risk is left behind
o So they find away to attribute the missing risk factors and adding to the equations
o Burton believes that Index is better than stock
o There is no persistence in excess performance
o The only clear predictability → the higher the cost of management fees → the higher the turnover → the worse the fund does
§ Predictable Stock Price
o You can’t make money in the market and can’t lose money in the market
o You can lose transaction cost but can’t lose money in the market
o There is differences between statistically significant relationship and an economically significant relationships
o Robert Shiller said that stock price is too volatile to be explained by earnings and dividend
o Some people associated lower divided → lower future returns
o When P/E multiples are well above average → Future markets will going down
o When P/E multiples are well below average → Future markets will be higher than normal
o There are bubble effect → some arbitrageurs investors that just wants to do profit taking in the very short time → the market getting worse
o Market are efficient → market will “decide” the future of a company
o This EMH theory makes the price of the stocks or the currencies are predictable
o The predictable prices used by some fund hedging company to make some profit
o Market law → the worse get better → the good get worse → no strategy can make some money
§ EMH Account for Trading Volume
o In EMH → Trading is basically driven by re-balancing or liquidity needs
o Allows investors to look at the same information → but interpret differently
o It could be happen because they have biased interpretation and information
o Two major forces
Ø Private information → affecting guessing process → converged investors with some belief → motives willingness to trade
Ø Heterogeneity of Option → affecting guessing process → converged investors with some belief → motives willingness to trade
o Overconfidence happen → growth stocks always overpriced relative to value stocks
o Loss aversion → strong element of people’s psychology → people feel much worse if they lose something relative to how good they feel if they won something
§ Rationally and Arbitrage
o Profit maximization and self-interest → drive the investor’s activities
o If you see mispricing in the market → act on it immediately → because it is not going to last very long
o If markets were as irrational and inefficient as people say → we clearly ought to see some opportunities for excess return
o When there is too much arbitrage → We end up with the appearance of a pattern when there’s no real pattern to be found
§ Investor Choice and Public Policy
o It is better if we make our portfolio diversified
o Behavioral finance suggest that more choice may not be good, which has very different policy implication
o Giving people opportunity to trade in their Social Security portfolios is not necessarily a good thing
o EMH is so powerful in insisting markets → more efficient
o Too much information can make the decisions biased
§ How Do the Experts Invest Their Money?
o Burton recommend → mix 65% Stocks and 20% Bonds → mid 20
o And mix 25% stocks and 50% bonds → late 60s or beyond
§ The Survival of EMH
o Behavioral Finance and the EMH still can be co-exist → some in behavioral finance is very important for investors
o Neither Behavioral finance nor EMH offers any real insights into people’s attitudes toward the market
o A random walk down the wall street publish by Prof. Burton
o It seems say that the price in the money market are not systematically predictable
o Underpinning the argument → most fundamental tenets of finance → market are efficient → they are rationally and accurately reflect all publicly available information
o There still a lot of controversy about the Efficient Market Hypothesis or EMH
o Burton Believes that monetarism worked well → there is a strong relation between economic quantity and the quantity of money
o But this EMH concept has been extensively analyzed and has meet the test of time extraordinary well
o Even in weekend effect and January effect does not held up but most of part can be handled by this hypothesis theory
o In the past 30 years people believes that EMH is perfect
o Nowadays some expertise has been realized that a lot of Unsystematic Risk is left behind
o So they find away to attribute the missing risk factors and adding to the equations
o Burton believes that Index is better than stock
o There is no persistence in excess performance
o The only clear predictability → the higher the cost of management fees → the higher the turnover → the worse the fund does
§ Predictable Stock Price
o You can’t make money in the market and can’t lose money in the market
o You can lose transaction cost but can’t lose money in the market
o There is differences between statistically significant relationship and an economically significant relationships
o Robert Shiller said that stock price is too volatile to be explained by earnings and dividend
o Some people associated lower divided → lower future returns
o When P/E multiples are well above average → Future markets will going down
o When P/E multiples are well below average → Future markets will be higher than normal
o There are bubble effect → some arbitrageurs investors that just wants to do profit taking in the very short time → the market getting worse
o Market are efficient → market will “decide” the future of a company
o This EMH theory makes the price of the stocks or the currencies are predictable
o The predictable prices used by some fund hedging company to make some profit
o Market law → the worse get better → the good get worse → no strategy can make some money
§ EMH Account for Trading Volume
o In EMH → Trading is basically driven by re-balancing or liquidity needs
o Allows investors to look at the same information → but interpret differently
o It could be happen because they have biased interpretation and information
o Two major forces
Ø Private information → affecting guessing process → converged investors with some belief → motives willingness to trade
Ø Heterogeneity of Option → affecting guessing process → converged investors with some belief → motives willingness to trade
o Overconfidence happen → growth stocks always overpriced relative to value stocks
o Loss aversion → strong element of people’s psychology → people feel much worse if they lose something relative to how good they feel if they won something
§ Rationally and Arbitrage
o Profit maximization and self-interest → drive the investor’s activities
o If you see mispricing in the market → act on it immediately → because it is not going to last very long
o If markets were as irrational and inefficient as people say → we clearly ought to see some opportunities for excess return
o When there is too much arbitrage → We end up with the appearance of a pattern when there’s no real pattern to be found
§ Investor Choice and Public Policy
o It is better if we make our portfolio diversified
o Behavioral finance suggest that more choice may not be good, which has very different policy implication
o Giving people opportunity to trade in their Social Security portfolios is not necessarily a good thing
o EMH is so powerful in insisting markets → more efficient
o Too much information can make the decisions biased
§ How Do the Experts Invest Their Money?
o Burton recommend → mix 65% Stocks and 20% Bonds → mid 20
o And mix 25% stocks and 50% bonds → late 60s or beyond
§ The Survival of EMH
o Behavioral Finance and the EMH still can be co-exist → some in behavioral finance is very important for investors
o Neither Behavioral finance nor EMH offers any real insights into people’s attitudes toward the market
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