This document summarizes key concepts from a course on financial theory and economic applications taught during the 2013/2014 academic year. It discusses Eugene Fama's efficient market hypothesis, which proposes that stock prices reflect all publicly available information. The document also examines how new information affects stock prices, different forms of market efficiency, and the differences between speculation and hedging.

1. Prepared by: Abdulkadir Tifow
Course Name: Financial Theory and Economic application
Prof: Dr: Güven Sevil
Academic year: 2013/2014

2. 

The Efficient market Hypothesis (EMH) term was
developed by Professor Eugene Fama in 1960‘s.
and he had modified for the theory in 1970.
The Efficient Market Hypothesis states that the
price of a financial asset reflects all available
public information.
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3. 
1. What is “all available information”?

2. How the new information affects the stock
prices?

4. Example.
Suppose that Merck announces a new allergy drug
that could completely prevent hay-fever. How
should the share price of Merck react to this
news?


5. Consider three hypothetical paths for price
adjustments:
 1. Increase immediately to a new equilibrium level
 2. Increase gradually to the new equilibrium level
 3. First over-shoot and then settle back to new
equilibrium level.


6. Stock
Price
Overreaction to “good
news” with reversion
Delayed
response to
“good news”
Efficient market
response to “good news”
-30
-20
-10
0
+10
+20
+30
Days before (-) and
after (+) announcement

7. Stock
Price
Efficient market
response to “bad news”
-30
-20
-10
Overreaction to “bad
news” with reversion
Delayed
response to
“bad news”
0
+10
+20
+30
Days before (-) and
after (+) announcement

8. 
Number of Market Participants

Availability of Information

Limits of trading

Transaction costs

Information costs
128

9. Perfect Capital Markets are characterized by the
following attributes:
1) Information is equally available without cost to all
traders
2) Security prices are independent of individual
buyers, sellers and issuers
3) Transactions costs are zero- there are no
brokerage fees, transfer taxes, or other
transaction cost incurred when securities are
exchanged.


10. 

Technical Analysis : is a security analysis
methodology for forecasting the direction of prices
through the study of past market data.
Fundemental Analysis : A method of security
valuation which involves examining the company's
financials and operations, especially sales,
earnings, growth potential, assets, debt,products
and Competition.

11. 
Weak form

Semi-strong form

Strong form

12. The Weak form effeciency forms İmplies that
all historical price and volume data for securities
are reflected in price.
Implication:
Investors can not use technical analysis to get
economical profit predict and beat a market.

13. 
o
o
o
o
The Semistrong-form reflect all publicly available
information:
Historical price data, total trading volume data, rates
of return
Earning reports
New product develeopments
Marketing plans and Dividend payments…e.t.c
Implications: an investor cannot use fundemental
analysis to economical profit.

14. 
The strong-form efficient market hypothesis
assumes that that security prices reflect all both
public and private information available.
Implication:
Investors cannot base their investment decisions on
technical analysis, fundamental analysis or inside
information.

15. 
Market manipulation is a deliberate attempt to
interfere with the free and fair operation of the
market and create artificial, false or misleading
appearances with respect to the price of, or
market for, a security, commodity or currency

16. 
Pump and dump

Painting the Tape

Wash trade

Bear raid

Churning

17. 
Speculation in the stock market is when someone
believes a stock or commodity is going to up.
Taking large risks, especially with respect to trying
to predict the future; gambling, in the hopes
of making quick
and large gains.

18. 
Speculators are people who analyze and forecast
futures price movement, trading contracts with the
hope of making a profit. Speculators put their
money at risk and must be prepared to accept
outright losses in the futures market.

If the speculation is Positive, they buy or sell. If
the speculation is negative they don’t buy or sell.
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19. 
Making an investment to reduce the risk of
adverse price movements in an asset. Normally, a
hedge consists of taking an offsetting position in a
related security, such as a futures contract.

Hedger: An individual that participate in
purchasing investments to hedge against one
another to obtain the maximum level or profit and
security against price movements.

20. Speculator
Hedger
People who buy and sell the future
contracts by predicting the future
prices goes up
People who buy and sell the actual
commodities can use the futures
markets to protect themselves from
commodity prices that move against
them. They’re called hedgers.
Speculators accept risk in the futures
markets, trying to profit from price
changes.
Hedgers use the futures markets to
avoid risk, protecting themselves
against price changes.
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