- Example: and shoulders” price reaches the neckline “head – (straight, black line) then price will fall substantially. - Some claim the approach is linked to finance”: “behavioral - patterns may be rooted in irrational but predictable behavior. - Newer methods: neural networks, chaotic dynamics - also look for patterns in past data for use in predicting future prices. (3) Efficient Markets Hypothesis: (see extended discussion below) Efficient Markets Hypothesis (EMH): - Stock prices reflect present value of future expected profits. - How are these expectations formed? - Efficient Markets view assumes expectations” “rational i.e. expectations will be the guess” or forecast” and “best “optimal will make use of all relevant available information. - Why? Profitable to be accurate. - Investor behavior ensures that stock prices build in relevant current information on future profits. - Say news” becomes known: expected profits. “good ↑ - investors realize the stock price will rise. - Investors buy to profit from the expected price rise. - Extra demand raises the price. - news” is now built into the stock price. “Good
- Example: “head and shoulders” – price reaches the neckline (straight, black line) then price will fall substantially. - Some claim the approach is linked to “behavioral finance”: - patterns may be rooted in irrational but predictable behavior. - Newer methods: neural networks, chaotic dynamics - also look for patterns in past data for use in predicting future prices. (3) Efficient Markets Hypothesis: (see extended discussion below) Efficient Markets Hypothesis (EMH): - Stock prices reflect present value of future expected profits. - How are these expectations formed? - Efficient Markets view assumes “rational expectations” i.e. expectations will be the “best guess” or “optimal forecast” and will make use of all relevant available information. - Why? Profitable to be accurate. - Investor behavior ensures that stock prices build in relevant current information on future profits. - Say “good news” becomes known: ↑ expected profits. - investors realize the stock price will rise. - Investors buy to profit from the expected price rise. - Extra demand raises the price. - “Good news” is now built into the stock price.