Question

1. Explain how asset bubbles may (or may not) support the efficient market hypothesis.

2. Explain how the positive earnings announcement price drift (or Surprise Unexpected Earning (SUE)) works. How would you use SUE in this Fall 2020 earning reporting season if you were a hedge fund manager?

Answer 1

1) The efficient market hypothesis (EMH) cannot support economic bubbles because, strictly speaking, the EMH would argue that economic bubbles don't really exist. The hypothesis's reliance on assumptions about information and pricing is fundamentally at odds with the mispricing that drives economic bubbles.

Efficient market hypothesis is a theory that holds the belief that stock prices are accurately priced and reflect all of the available information in the market.

Whether bubbles are predictable is subject to debate. Behavioral finance, a field that attempts to identify and examine financial decision making, has uncovered several biases in investment decision making, both on an individual and market level.

Market Information

All investors review information differently and could, therefore, apply different stock valuations. Also, some investors might exhibit inattentiveness to certain kinds of information.

Human Emotions
Stock prices can be affected by human error and emotional decision making. Herding behavior is when all market participants act in the same way to the information available.

Human Bias
Confirmation bias can occur when investors only accept and research information that supports their view of the investment.

2) The current fall in Earning is basically due to restrictions imposed in various geographies. Company is not able to open its plants and people also have lost their jobs and have less earnings. So,they are not able to buy products and also they are curious about their future.

If the company is s working in pharma industry then it is possible that they are impacted less compair to other industries. Because the products they manufactured are life essential and cannot avoidable. So, earnings less impacted .