Thuyết trình tài chinh doanh nghiệp The Global Financial Crisis and the Efficient Market Hypothesis What Have We Learned

“ Add your company slogan ” Ray Ball, University of Chicago Ray Ball, University of Chicago The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned? GVHD: GS. TS Trần Ngọc Thơ Nhóm 5: 1.Nguyễn Đăng Khôi 2.Trịnh Thị Liên 3.Nguyễn Thị Hoài Linh 4.Nguyễn Thị Huyền Trang TCDN1 Contents What Does the EMH Say? 1 What Doesn’t the EMH Say? 2 Some Lessons from the Financial Crisis 3 Closing Thoughts 5 Anomalies, Behavioral Finance, and the Future of “Market Efficiency” 4 TCDN 2 TCDN Global financial crisis Global financial crisis 3 The Efficient Market Hypothesis Free market economics Coordinated political forces do not improve on the “atomistic” actions of individuals—has come under concerted attack The Blame The Blame Competitive financial markets ruthlessly exploit all available information when setting security price TCDN 4 Jeremy Grantham EMH “responsible for the current financial crisis” because of its role in the “chronic underestimation of the dangers of asset bubbles” by financial executives and regulators Justin Fox Say much the same thing in his meticulously researched, well-written, and best-selling history of modern financial economics, The Myth of the Rational Market EMH EMH is is responsible responsible for the for the current current financial crisis financial crisis TCDN 5 The Turner Report by the UK’s market regulator reaches a similar conclusion. The reasoning boils down to this: TCDN Content EMH  asset price bubble The EMH—like all good theories—has major limitations The claim that it is responsible for the current worldwide crisis seems wildly exaggerated. 6 1720 Dutch tulip “mania • Unusually large price run-ups. • Unusually large drops. • All of these occurred well before the advent of the EMH and modern financial economic theory. The same feature 1630 1840s 1926 1929 South Sea Company Bubble The Railway Mania Florida Land Bubble Events surrounding the market collapse 1965 1 TCDN 7 TCDN EMH EMH Eugene Francis "Gene" Fama (Born February 14, 1939)  American economist,  Professor of Finance at the University of Chicago Booth Scho ol of Business  In 2013, Nobel Memorial Prize in Economic Sciences with Robert Shiller and Lars Peter Hansen.  The prices reflect all available information in the market. So no-one can earn excess returns.  There are three major versions of the hypothesis: "weak", "semi- strong", and "strong".  Fama is most often thought of as the father of the efficient- market hypothesis, beginning with his Ph.D. thesis.  In January 1965, Eugene Fama published his dissertation arguing for the random walk hypothesis WHO WHAT WHEN 8 Các dạng EMH TCDN  Các phân tích kỹ thuật không mang lại lợi nhuận cao hơn mức trung bình chung của toàn thị trường. 9 2  The argument: because of EMH, people (price- taker) viewed current prices as correct and so failed to verify true asset values (EMH  bubbles).  BUT: Money flows into mutual funds strongly follow past performance, as if individual managers consistently beat the market over time, and despite the evidence that the past performance of most money managers is a poor predictor of future performance. TCDN 10 [...]... dishonest accounting  And they would have been exceptionally skeptical of the surreally high and stable returns reported over an extended period by Bernie Madoff 25 TCDN Some Lessons from the Financial Crisis What have we learned about market efficiency from the financial crisis? The short answer is: some things we should have known beforehand 26 TCDN 1 A Theory is Just a Theory  It is not a fact... modern financial theory has made its major breakthroughs by ignoring them  Problem is faced by those who assume the crisis originated in the financial sector and then spread to the real sector, reducing economic output and raising unemployment  Indeed, the popular term financial crisis takes this assumption as a given 34 TCDN 2 There are Limitations to the EMH as a Theory of Financial Markets  The. .. limitations = >The most important of these limitations stems from the fact that EMH is a “pure exchange” model of information in markets  The theory makes no statements whatsoever about the “supply side” of the information market: about how much information is available, what its reliability is, how continuous it is, the frequency of extreme events  The theory addresses only the demand side of the market The. .. opposite: if anything, the hypothesis predicts we should not be able to predict crises If we could predict a market crash, current market prices would be inefficient because they would not reflect the information embodied in the prediction  Under the EMH, then, one can predict that large market changes will occur, but one can’t predict when 20 TCDN 3 The stock market should have known we were in an asset... =>not mean that the problems originated in, or were “caused by” the financial markets =>They were just the proverbial canary in the coal mine 35 TCDN 2 There are Limitations to the EMH as a Theory of Financial Markets  Information is modeled in the EMH as an objective commodity that has the same meaning for all investors In reality, investors have different information and beliefs  The actions of... in the real asset markets (chiefly in real estate), but was first reflected in the financial markets— precisely because those markets are more efficient  The general public might have first learned of the collapse in real asset prices from the credit market liquidity problems and widening spreads that emerged in the summer of 2007, or from the collapse of Bear Sterns or Lehman Brothers, or from the. .. Much of the enormous losses by banks and investment banks in 2007-2008 originated in their trading desks and proprietary portfolios, whose strategies and very existence were premised on making money from market mispricing  Investors who poured money into the property market, stock market, and other asset markets in the years while the bubbles were forming cause they believed prices would... invest in, what among value of the firm pure exchange investors independent of determines security risk,… and among investors 32 determines the price of an option on the share TCDN 2 There are Limitations to the EMH as a Theory of Financial Markets  CAPM takes the riskless rate, market risk premium, and individual security betas as given  But in the event of a large shock in a real asset market What values... prices were allowed to deviate substantially from their true values The critique confuses a statement about an equilibrium “after the dust settles” and the actions required to obtain that equilibrium 19 TCDN 2 The market should have predicted the crisis  The EMH does not imply that one can—or should be able to—predict the future course of stock prices generally, and crises in particular  Exactly the. .. Greenspan  The speech was given on December 5, 1996, a day on which the Dow Jones closed at 6437 If that statement is taken to mean that prices were too high at the time, the clear implication is that by today—when we all know how inefficient the market is and how irrationally exuberant we were 13 years ago  And after 13 years to reflect on Greenspan’s warning, investors are not acting as if there was . Ball, University of Chicago Ray Ball, University of Chicago The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned? GVHD: GS. TS Trần Ngọc Thơ Nhóm 5: 1.Nguyễn Đăng. Efficiency” 4 TCDN 2 TCDN Global financial crisis Global financial crisis 3 The Efficient Market Hypothesis Free market economics Coordinated political forces do not improve on the “atomistic” actions. hits. TCDN 13 The reason for the losses TCDN EMH = 14 What the crisis tells us about the efficient markets theory?  Does the rapid and substantial fall in prices that occurred across countries and asset