Efficient Markets Flashcards
what is the efficient market hypothesis
says that stock prices already reflect all available information
new information is unpredictable - if we could predict it, it would be part of tpday’s infomarion
so stock prices change in repsonse to new information
assumption of efficient market hypothesis
markets adjust to include new information almost immediately
all investors interpret information the same way, they are all rational and risk averse
the only way to outperform the market in the efficient market hypothesis is by what
luck
examples of public info
accounts
media articles
analyst reports about company or industry
example of private info
people working in the company know about info that has not yet been made public that could have an impact on the share price
what is insider trading
trading on information that is not available to the public domain
why are there strict rules on insider trading
to provide a level playing field
CEOs, families and friends could buy and sell their own shares then
three types of available info
past
public
private
is basing market prices on just past info efficient
no - weak
is basing market prices on just past and public info efficient
semi strong
is basing market prices past, public and private info efficient
strong
why will we never have strong market efficiency
cannot trade on private information
if you believe the market is efficient are you more likely to be a passive or active investor
passive
what is fundamental analysis
pouring through accounts and looking at the industry and their competitors
trying to be ahead of the markt
using economic and accounting information to predict stock prices
how to asses whether an asset is over or undervalued
DCF model
Compare to peers (eg Tesla)
what is technical analysis
using prices and volume information to predict future price
depends on sluggish response of stock prices
examples of passive investments
EFTs
Index Funds
what is market vs intrinsic value
market value is the price at which an asset is currently being bought/sold
intrinsic value is the value that would be if investors had complete information
what are some structural factors affecting market efficiency
- accounting standards and financial disclosures
- number of market participants
- limits to trading eg short selling
- transaction costs
rime frame
what does behavioural finance assume
investors have cognitive biases that may lead to irational decision making
they may under or over react to new infromatio
what can herding cause
booms
busts
greed can be speculative
things become overvalued and not enough people stop to question the validity of the bubble eg tech prices
fear - when things go wrong there is a stampede to exit the market
what is bounded rationality
rather than compltely optimising, humans don’t waste their time and energy and just make a decision with a good enough effort to be satisfied
examples of cognitive biases
over confidence
over optimism
confirmation bias
anchoring bias
what is confirmation bias
echo chamber
finding data that confirms what you already believe
what is anchoring bias
relying too heavily on the first piece of information given on a ropic
what is frame dependene
the tendency of individuals to make different decisions depending on how a question is framed
what is loss aversion
loss causes more pain than gains create pleasure
an assymetry
causes asymmetrical behaviour
what are heursitics
shortcut used to make decisions
stereotypes and limited examples
what is hyperbolic disocunitng
favouring immediate rewards over rewards in the future
even if present value of future rewards is higher
