Lecture 7 - Efficient Markets
Initially, Professor Shiller looks back at David Swensen's guest lecture, in particular with respect to the Sharpe ratio as a performance measure for investment strategies. He emphasizes the empirical difficulty to measure the standard deviation, specifically for illiquid asset classes, and elaborates on investment strategies that manipulate the Sharpe ratio.
Subsequently, he focuses on the Efficient Markets Hypothesis. This theory states that markets efficiently incorporate all public information, which consequently renders beating the market impossible. For example, technical analysis fails to provide powerful, short-run profit opportunities.
A consequence of the Efficient Markets Hypothesis is that stock prices follow a Random Walk, as innovations to the stock price must be solely attributable to news. Professor Shiller contrasts the behavior of a Random Walk with that of a First-Order Autoregressive Process, and concludes that the latter statistical process matches the reality of the stock market more closely. This conclusion, combined with the evidence that investment managers like David Swensen are capable of consistently outperforming the market leads Professor Shiller to the conclusion that the Efficient Markets Hypothesis is a half-truth.
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- Technology and Invention in Finance
- Financial Markets: Course Introduction
- Risk and Financial Crises
- Portfolio Diversification and Supporting Financial Institutions
- Insurance, the Archetypal Risk Management Institution
- Barron's Criticism, Determinants of Investment Return
- Lecture 7 - Efficient Markets
- Lecture 8 - Theory of Debt, Its Proper Role, Leverage Cycles
- Lecture 9 - Corporate Stocks
- Lecture 10 - Real Estate Finance
- Lecture 11 - Behavioral Finance
- Lecture 12 - Misbehavior, Crises, Regulation and Self Regulation
- Lecture 13 - Overview of Banks
- Lecture 14 - A Brief History of AIG with Maurice "Hank" Greenberg
- Lecture 15 - Forward and Futures Markets
- Lecture 16 - Banking and Regulations in China with Laura Cha
- Lecture 17 - Options Markets
- Lecture 18 - Monetary Policy
- Lecture 19 - Overview of Investment Banking
- Lecture 20 - Professional Money Managers and Their Influence
- Lecture 21 - Exchanges, Brokers, Dealers, Clearinghouses