091 Efficient Market Hypotesis

Basics of trading:

• if price is significantly less than value, buy
• if price is significantly more than value, short

Price movement is relative to market

Technical analysis:

• Price & volume only

Fundamental analysis

• Financial statements
• P/E ratio, cash on hand, dividends

The info for the analysis comes from:

• Price/Volume: the markets
• Fundamentals: SEC filings
• News: Exogenous sources

092 Efficient Markets Hypotesis

The variations of the prices reflect what the market thinks is the correct price There are 3 versions of the Efficient Markets Hypotesis:

• Weak: prices reflect all past publicly available information
  • Prohibits profit from Technical Analysis
• Semi-strong: weak + prices instantly change to reflect new public information
  • Prohibits profit from Technical Analysis and Fundamental Analysis
• Strong: Semi-strong + prices instantly reflect even hidden or 'insider' information
  • Prohibits profit from Technical Analysis, Fundamental Analysis and even from insider information

But the hypoteses doesn't seem to be true:

• The fundamental information doesn't correlate
• Behavioural Economics -> cognitive biases:

• The traders are humans, not perfectly calculating machines. They suffer from:

• Overconfidence
• Overreaction
• Information bias

093 Event Studies in Detail

Events affect the price.

Price reflects the event before it happens => news leakage

Negative news:

• 1st day: sharp negative reaction
• 2nd day: negative reaction
• 3rd-nth day: recovery

Positive news:

• 1st day: sharp positive reaction
• 2nd day: weak positive reaction
• From 2nd day: flat out

Events effects can be measured

• With confidence intervals