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Ch 7 Stock Market, Rational Expectations, and the Efficient Market Hypothesis

by: Ashlie Meckley

Ch 7 Stock Market, Rational Expectations, and the Efficient Market Hypothesis ECON 3303

Marketplace > University of Texas at Arlington > ECON 3303 > Ch 7 Stock Market Rational Expectations and the Efficient Market Hypothesis
Ashlie Meckley
Money and Banking
Chi-Young Choi

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Money and Banking
Chi-Young Choi
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This 3 page Class Notes was uploaded by Ashlie Meckley on Tuesday October 13, 2015. The Class Notes belongs to ECON 3303 at University of Texas at Arlington taught by Chi-Young Choi in Summer 2015. Since its upload, it has received 53 views.


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Date Created: 10/13/15
Ch 7 Stock Market Rational Expectations and the Efficient Market Hypothesis 0 Characteristic of Stock 00000 O o Rational Expectations 0 O 0 Stock Indices in the US Direct Finance Lecture Dates October 9th 13th No maturity capital market First appeared in the 16th century to finance the dangerous voyages for global exploration Share are issued in small denominations Share are transferable Most stockholders no longer receive certificates Pays dividends to the shareholders Stockholders are residual claimants gets paid after all else Composite indices are used to represent the overall movement of the stock prices Make use of all available information No unused information I Impossible to predict future movements Efficient Market No one can beat the market average No use of investment advise Investment quotdashboardquot o Picking stocks by throwing darts at a dart board Random Wall Process 0 Impossible to predict 0 Stock same chance to go up as down PS Price of stock e expected D dividends I interest rate PS De De 1 ie 1 ie2 De and Ie Fundamentals 0 Future Dividends not fixed 0 Future Interests Rate not fixed I Adaptive O DJIA I Top 30 Look at past to predict future I Originally 12 I GE only one from beginning 0000 0 AT ampT replaced by apple S amp P 500 Russell 2000 Willshire 5000 NASDAQ NYSE composite index 0 Fed in Stock Market 0 Stock Price Movements o Fed Watcher Look at Fed amp what will be next move 0 O Fluctuations in stock value 0 Volatile 0 show how stocks are valued Valuation of stocks Reflect the future net cash flows Stocks are risky 0 Because residual claimants Can change Money Supply MS Money Supply increase 0 Interest rate Decrease 0 Economy Boost Expansionary monetary is good news for stock market Expectations plays essential role 0 High stock price next year means high stock price today Usually former employees 0 Rate Of return on SECUFltV 0 000 O R E i g F C Pt R rate of return on security Pm price of the security at t 1 Pt price of security at time t C cash payment 0 Efficient Market Hypothesis O React within ten minutes to an earnings announcements 0 Security s price fully reflects all available information O In Favor Perform well in the past does not mean they will do well in the future If information is already public available then they won t react to the market Stock prices follow a random walk Technical analysis cannot successfully predict changes in stock price 0 Against I Smallfirm effect I January effect 0 Lower prices in December than January I Market Overreaction I Excessive Volatility I Mean reversion 0 Buy below profit or above mean line I New information is not always immediately incorporated in the stock market 0 Buy and hold strategy most sensible o Speculative Bubble I Influenced by factors other than fundamentals I Mispricing o Bubbles o Inflated asset prices that are not based on expected future profits 0 Occur because of investors buy stocks solely on the belief that they can sell them for a higher price in future 0 Dividend price ratio 0 Lower the ratio the more likely to be bubble I Dividends price 0 PE Ratio 0 Price earnings ratio 0 Higher the ratio the more likely to be a bubble o For each earning prices are higher by this o More complicated statistical tools


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