Open Yale Lecture 6

Efficient Markets vs. Excess Volatility

http://www.youtube.com/watch?v=pXJb29s3nmY&list=PL8F7E2591EE283A2E&index=6&feature=plpp_video


CLASS NOTES:

Efficient Markets:

Harry Roberts (1967)

Market price incorporated with:

Weak Form – info on past prices

Semi Strong – all public info

Strong – all info 

Random Walk Theory 

Random Walk Theory for Stock Market  - Karl Person

  Xt = Xt-1 + Et

  Et : Noise

  News (about values) appeared randomly so it creates fluctuation （noise） --> stock price up/down as random walk

The First Order Auto-regressive Model 

y = a+bx+u

è Forecast of Stock Market 

SUMMARY:


First the class talked about what is efficient market. (Market is a price of something. For instance, stock price) There are some definition historically but one talked was by Harry Roberts (1967). The theory models the types of information and based on them, efficient market is classified to weak, semi strong, and strong. For example, "Strong efficiency" is depends on all information available. Normally stock market is semi-strong (means depending on public info) 

Next the class discussed prediction (of price behavior in the market) as a security. 2 algorithms (math formulas) such as Random walk and Auto regression, were introduced and these theories has been not  only applied for economics but also applied to predict any natural random phenomenon under study. However in my opinion, the application of these theory seemed to be difficult and as professor Shiller himself said, not many are succeeded. (If easy, too many rich people?) This was one of HW for Yale students and I thought it is really hard -_-);;