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Lecture 6 -  Efficient Markets vs. Excess Volatility

Lecture 6 - Efficient Markets vs. Excess Volatility

This video was recorded at ECON 252 - Financial Markets. Several theories in finance relate to stock price analysis and prediction. The efficient markets hypothesis states that stock prices for publicly-traded companies reflect all available information. Prices adjust to new information instantaneously, so it is impossible to "beat the market." Furthermore, the random walk theory asserts that changes in stock prices arise only from unanticipated new information, and so it is impossible to predict the direction of stock prices. Using statistical tools, we can attempt to test the hypotheses and to predict future stock prices. These tests show that efficient markets theory is a half-truth: it is difficult but not impossible for some people to beat the market. Reading assignment: Robert Shiller, Irrational Exuberance, chapters 10 and 11 David Swensen, Pioneering Portfolio Management, chapter 8 Jeremy Siegel, Stocks for the Long Run, chapters 3, 4, 5, 16, 17 and 18 Resources: PowerPoint slides from screen - Lecture 6 [PDF]

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