Lesson: Advanced Finance Efficient Capital Markets 04/05/2012 Dennis Brunsmann Thorben Meiners
Structure 1. Introduction What is this lecture about Financial Economics Prof. Fama Main question Organisation of the lecture Case 2. The Fama 1970 Paper Kind of Paper Structure of the Paper
P2 Structure Major Propositions Impact of the Paper 3. The Fama 1991 Paper Kind of Paper Structure of the Paper Major Propositions Impact of the Paper 4. Expert Discussion about EMH 5. Lesson Learned
Folie 3 P2 punkt 5 Lesson Learned? was soll das heißen? entweder Outcome oder Learning Outcome oder alternativ 'What we have learned' Praktikant/in VHS 1; 04.05.2012
1. Introduction 1.1 What is this lecture about? 1.2 Financial Economics 1.3 Prof. Fama 1.4 Main question 1.5 Organisation of the lecture 1.6 Case Repetition 1.6.1 Case Group Work 1.6.2 Case Results
1.1 What is the lecture about? Presentation and discussion of the papers: Fama (1970): Efficient Capital Markets: A Review of Theory and Empirical Work, in: Journal of Finance 25(2), 383-417. Fama (1991): Efficient Capital Markets: II, in: Journal of Finance 46(5), 1575-1617.
1.2 Financial Economics Concerned with the allocation and deployment of economic ressources, both spatially and across time, in an uncertain environment 1 Financial Economics Finance Investment Management Efficient Markets Hypothesis 1 Merton (2009)
P3 1.3 Prof. Fama Life Born: 14.02.1939 in Boston, USA 1963/64: MBA and PhD at University of Chicago in Economics and Finance Institution: Spend his teaching career at the University of Chicago Main Research Theoretical and empirical work on: Efficient Markets Hypothesis Portfolio Theory Asset Pricing About 100 publications
Folie 7 P3 Economics and Finance - spezifische Fachrichtungen werden immer groß geschrieben Dr. ist im englischen PhD spend his teaching career - kann man sagen, besser wäre: 'established his career' oder ich vermute mal das Prof. Professor heißen soll oder? warum schreibt ihrs nicht aus? abkürzungen sind unprofessionell und stören hier iwie die schöne graphik ;) Praktikant/in VHS 1; 04.05.2012
P4 1.4 Main question Is there evidence for Efficient Capital Markets and its development over time?
Folie 8 P4 it's = it is oder it has, hier aber 'its' ohne apostroph (pronom) time klein! Praktikant/in VHS 1; 04.05.2012
P5 1.5 Organisation of the lecture 1. Case-oriented group work 2. Overview about the papers 3. Discussion about major topics 4. Video of an expert discussion about EMH
Folie 9 P5 Organisation wird nicht mehr mit z geschrieben oder nurin den USA, v.a. habt ihrs in der structure auch mit s geschrieben! Punkt 1 hört sich komisch an! Wie wäre: Case-oriented or case-centered groupwork Overview of, nicht about, the papers könnt ihr nutzen da es bestimmte papers sind, würde aber auch ohne the gehen! Praktikant/in VHS 1; 04.05.2012
1.6 Case - Repetition Strong form: all available information is fully reflected in asset prices. Semi-strong form: all public available information is fully reflected in asset prices. Weak form: all information concerning past prices is fully reflected in asset prices.
1.6.1 Case Group Work Which form of efficiency do you see in the video and why? Please form groups and discuss this topic
1.6.2 Case Results Market Efficiency in Real Time Semi-strong form of Market Efficiency Statistically and economically significant reaction within seconds after the announcement Active traders enhance market efficiency Market is efficient enough that a trader cannot generate profits based on widely disseminated news unless he acts immediately
2. The Fama 1970 Paper 2.1 Kind of Paper 2.2 Structure of the Paper 2.3 Major Propositions 2.4 Impact of the Paper
P6 2.1 Kind of Paper Fama s Paper is a Literature review Survey and discussion of literature in an area of study Highlights important ideas, arguments and results Points out the weaknesses, gaps or areas that need further study
Folie 14 P6 Literature Review is grammatikalisch falsch: 'Literary Review' und ich würde den Titel immer als Schlagzeile wählen: Fama's Paper as Literary Review Praktikant/in VHS 1; 04.05.2012
P7 2.2 Structure of the Paper (1) Title: Efficient Capital Markets: A Review of Theory and Empirical Work Introduction: Presents hypothesis of EMH and divides it into the three forms (strong, semi-strong, weak) Methodology: Presents problem in a more detailed way Presents underlying theoretical Framework Empirical Results By summarizing selected literature to support the EMH
Folie 15 P7 hypothesis als singular gemeint? wenn Plural : hypotheses, wenn singular dann fehlt 'a' Besser für pkt.2: Introduction: EMH Hypothesis which is divided into three forms pkt.3 what problem? e.g. 'presents the major problem...' by klein! Praktikant/in VHS 1; 04.05.2012
P8 2.2 Structure of the Paper (2) Results: Summarizes the foregoing findings Suggests areas of improvement for future research Literature cited: Fama cites a wide range of literature Even its own literature
Folie 16 P8 also sollte durch even ersetzt werden, besseres englisch! Richtig: Even its own literature Praktikant/in VHS 1; 04.05.2012
P9 2.3 Major Propositions (1) Strong form: best recognized as benchmark against which deviations from market efficiency can be judged Semi-strong form: has found evidence in empirical research Expected to be a major research area in future Weak form: empirical evidence is pretty strong and quite consistent
Folie 17 P9 Pkt.1??? was wollt ihr da bitte sagen? against what? Überarbeiten! expected to be a great or major research area pretty? kopiert? ansonsten not professional :) Praktikant/in VHS 1; 04.05.2012
P10 2.3 Major Propositions (2) EMH: Supporting evidence dominates contradicting EMH seems to be a sufficient approximation of reality Topic is not closed, lot of further research necessary
Folie 18 P10 approximation of reality Praktikant/in VHS 1; 04.05.2012
P11 2.4 Impact of the Paper Paper deals with one of the most fundamental and existing issues in finance Why are prices changing in security markets and how do this changes take place Has a large impact in academics and professional environment since publication
Folie 19 P11 pkt.2 fehlt ein fragezeichen?? Pkt.3 Has a large impact in the academic and professional enviroment since several years Praktikant/in VHS 1; 04.05.2012
3. The Fama 1991 Paper 3.1 Kind of Paper 3.2 Structure of the Paper 3.3 Major Propositions 3.4 Impact of the Paper
3.1 Kind of Paper The 1991 Paper is a Literature review and reconsideration of the 1970 s Paper Survey and discussion of literature in an area of study since the 1970 s paper Highlights new important ideas, arguments and results Points out the weaknesses, gaps or areas that need further study
P12 3.2 Structure of the Paper (1) Title: Efficient Capital Markets II Introduction: Describes developement of literature and impact of EMH Changes the categories of efficiency Strong form Tests for private information Semi-strong form Event studies Weak form Tests for return predictability Also includes work on forecasting returns with ratios
Folie 22 P12 the efficient categories Tests for geht garnicht!= trial or examination of private information/return... work on? meint ihr eine areit über forecasting returns dann 'of' Praktikant/in VHS 1; 04.05.2012
P13 3.2 Structure of the Paper (2) Methodology: Investigates the three forms of EMH by splitting them into subcategories Points out the effects on market efficiency Results: Gives a seperate conclusion for each form Literature cited: Larger amount of literature than the 1970 s paper
Folie 23 P13 Pkt.3 Larger amount of literature than the 1970's paper Praktikant/in VHS 1; 04.05.2012
3.3 Major Propositions (1) Private Information: Investors with private information do exist Test of abnormal returns, which would contradict the EMH, run into the joint-hypothesis problem Due to measuring abnormal returns over a long period Different results with 1-factor and multifactor models Event studies: Event studies are the cleanest evidence on efficiency Enrich our understanding of financial economics Least charged with the joint-hypothesis problem
3.3 Major Propositions (2) Return Predictability: Short-horizon: Supporting the evidence of the early work Long-horizon: there seems to be a strong negative autocorrelation, but the evidence has low statistical power
P14 3.4 Impact of the Paper Minor impact than the 1970 s paper Updates in research Describes anomalies Time-series anomalies Cross-sectional anomalies Describes weaknesses Underlying model (CAPM, Arbitrage-Pricing Theory) Joint-hypothesis The 1970 s categorization is still used
Folie 26 P14 Minor impact than the 1970's paper Updates in Research The 1970's categorization is still used --> kein often, deoppelt gemoppelt mit 'still' + Satzstellung! Praktikant/in VHS 1; 04.05.2012
P15 4. Expert Disussion about EMH Video shows experts discussing about the EMH Experts are: Roland Rousseau, Quantitative Analyst, ADEX Cobie Legrange, Fundamental Analyst, ACSIS Rowan Williams-Short, Fund Manager, Vunani Fund Manager Listen to what the questions are about and remember the experts origin
Folie 27 P15 Video about the EMH: experts discussion Listen to what the questions are about and remember their origin Praktikant/in VHS 1; 04.05.2012
P16 4. Expert Discussion about EMH As you can see: the EMH is widely discussed and has influence not only in the academic world Do you think capital markets are efficient? In which form? Any favourite: EMH or Behaviour Finance?
Folie 28 P16 As you can see: Any favourites? Praktikant/in VHS 1; 04.05.2012
P17 5. Lesson Learned EMH is a highly controversial concept, but its supporters are not restricted to the academic world Better understanding of how the capital markets work and how prices possibly accrue Insights which are relevant for our M.Sc: More time leads to better results!
Folie 29 P17, but its supporters are not restricted to the academic world (oder sowas ähnliches) Praktikant/in VHS 1; 04.05.2012
Thank you Micheal Jensen, Harvard Financial Economis: There is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Markets Hypothesis Peter Lynch, Investment Expert: Efficient markets? That s a bunch of junk, crazy stuff