【视频】经济学：金融市场 06 市场有效性与过度波动性(Markets vs Volatility)

Lecture 6 - Efficient Markets vs. Excess Volatility

Overview:

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

Financial Markets: Lecture 6 Transcript

February 01, 2008

Professor Robert Shiller: I want to talk today about the efficient markets hypothesis. Let me just first say, last lecture was about insurance and I was telling you about the theory of insurance and how it has evolved over the years and how it has produced some real benefits. Is that better? It says, "Mike volume." I wanted to just tie this in--the advantages of insurance that we have to some big events that occurred and that will, I think, point out the strengths and weaknesses of our institutions. We had a terrible hurricane a couple of years ago in Los Angeles; Hurricane Katrina damaged the city of--I'm sorry did I say Los Angeles? Y ou have to stop me when I say things that are obviously wrong. My mind lapses sometimes--New Orleans--and Los Angeles doesn't have to worry about hurricanes as far as I know, unless there's some major change. In New Orleans there was a Hurricane Katrina; it broke the levies that were surrounding the city and caused the flooding of the city.

What saved the people of the city, mostly? I would say it was actually the insurance institutions because the city was heavily damaged but homes were generally insured. There were some conflicts when this huge disaster came. Some people had wind insurance and some people had

flood insurance and it became difficult whether this was a wind or a flood problem, because the wind caused the flood. So, if you had only wind insurance are you covered? There was a lot bickering and arguments afterwards but I think it worked out well. There were surveys of customer satisfaction after the event and I think, generally, people were happy with their insurance companies. Of course, there were some that were not, who may have found out that they weren't covered; but on the whole, the experience worked well.

The other thing I want to say about the last lecture is that as financial progress moves on, the distinction between insurance and other forms of risk management may get blurred. One very interesting thing that's been happening is that we are starting to see development of another institution called the catastrophe bond, which is another way that people have for protecting themselves against catastrophes and it's not insurance. A catastrophe bond is a bond that the issuer doesn't have to pay off if there's a catastrophe. Y ou could have hurricanes--the City of New Orleans could raise money with catastrophe bonds that they have to pay back if there's no hurricane but they don't have to pay back if there is a hurricane. Or it could be some mixture: they'd pay back part of it if there is a hurricane. That's like insurance, isn't it? But it doesn't operate through an insurance company, it operates through a securities market.

A good example of that is a couple of years ago the Government of Mexico issued catastrophe bonds against earthquakes. Mexico City was hit by a terrible earthquake about twenty years ago and it's vulnerable to being hit again. So, what does Mexico do about this? Mexico could wait until there is a hurricane (sic) and hope that there's some international relief effort, but that's not a very good way to proceed. We want to arrange it in advance. What Mexico did was issue cat bonds that have to be repaid in the absence of a hurricane and have a lower repayment if there is--I'm sorry, I'm not on my best form today--earthquake. Mexico City does not have to worry about hurricanes either. Every area is different and they have their own individual characteristics.

Right now, the insurance industry is a bit challenged because--in terms of some risks--because the risks seem to be changing through time and, notably, it looks like hurricane risk is increasing. So people who are insured in--it seems to be increasing because of global warming, although I don't know if all scientists are agreed on that. If you live in a coastal area of Florida it does appear that your risk is increasing through time. So insurance companies want to raise your rates and this is a huge issue down in Florida. Well, the government has kind of taken over for the time being--insurance in Florida--because we have problems. People are having problems paying the increased insurance premium. I don't think we've figured out finally how insurance will ultimately look in a matter of years. But, I think that the important thing is that it's protecting against us already, maybe imperfectly, but it's already protecting us against some of our worst fears, like hurricanes and earthquakes. I think the system is evolving and we're getting new developments like cat bonds that are changing the way we're doing things. In the future, I think these will develop more and make us even better able to handle catastrophe risks.

Anyway, that's the last lecture. Today I wanted to talk about--back to securities markets or actually, more general, asset markets. I want to talk today about the efficient markets hypothesis, which is a very important intellectual construct that has guided a lot of theory in finance. I want to talk first