Professional Documents
Culture Documents
Are Financial
Markets Efficient?
Rof = R*
This equation tells us that current prices in a financial
market will be set so that the optimal forecast of a
securitys return using all available information equals
the securitys equilibrium return.
As a result, a securitys price fully reflects all available
information in an efficient market.
Note, R* depends on risk, liquidity, other asset returns
Overview
Reasonable starting point but not whole story
Cost Compare
Copyright Prentice
2012 Pearson 2006 Pearson Addison-Wesley.
Hall. All rights reserved. All rights reserved. 6-34
6-34
Case: Any Efficient Markets Lessons from Black
Monday of 1987 and the Tech Crash of 2000?
Overconfidence
People set overly narrow confidence bands, high
guess is too low and low guess is too high.
Results in being surprised too often.
Hedonic editing
Organizing Gains and Losses in separate mental
accounts.
One loss and one gain are netted against each other.
Two gains are savored separately
But multiple losses are difficult to net out against moderate
gains.