BUS 312 Lecture Notes - Lecture 10: Efficient-Market Hypothesis, Maurice Kendall, Autocorrelation
4 Dec 2018
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Key concepts: the efficient market hypothesis (emh, implications of emh, supportive evidence to emh, challenges to emh. Finance implications of emh: prices follow random walks, prices fully reflect all available information, no arbitrage in financial markets. The correlation coefficient between successive observations is the autocorrelation coefficient. Autocorrelation of -. 008 implies that with a stock price change of 1% more than the average yesterday, the best forecast of today"s change is -. 008% less than the average. Autocorrelation is very low, and insignificantly different form zero. What you want is a model for expected returns, which you subtract from observed returns, leaving unexpected (surprise) returns. The most frequently used technique to do this is an event study. Drift average six month returns following an announcement of quarterly earnings. Portfolio 1 contains the decile of firms with the worst news, portfolio 10 the firms with the best news.
