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  • Title: Efficient Market Hypothesis
    Descriptive info: .. Efficient Markets Hypothesis.. Download.. pdf:.. SEWELL, Martin, 2011.. History of the efficient market hypothesis.. Research Note RN/11/04, University College London, London.. Introduction.. Definitions.. Key Papers.. Taxonomy.. History.. Random Walk.. Joint Hypothesis.. Impossible.. Books.. Bibliography.. |.. Webmaster:.. Martin Sewell..

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  • Title: Efficient Markets Hypothesis: Introduction
    Descriptive info: Home.. Efficient Markets Hypothesis: Introduction.. Markets.. Whenever there are valuable commodities to be traded, there are incentives to develop a social arrangement that allows buyers and sellers to discover information and carry out a voluntary exchange more efficiently, i.. e.. develop a market.. The largest and best organised markets in the world tend to be the securities markets.. Efficiency in Economics.. The concept of.. efficiency.. in economics is a general term for the value assigned to a situation by some measure designed to capture the amount of waste or friction or other undesirable economic features present.. Within this context, it has several quite distinct meanings.. For example,.. allocative efficiency.. is concerned with the optimal distribution of scarce resources among individuals in the economy.. An.. efficient portfolio.. is one with the highest expected return for a given level of risk.. efficient market.. is one in which information is rapidly disseminated and reflected in prices.. Important.. The EMH has been the central proposition of finance since the early 1970s and is one of the most contoversial and well-studied propositions in all the social sciences.. The history of the EMH is covered in detail.. here.. , Bachelier (1900), Samuelson (1965) and Fama (1970) being the most important papers.. Definition.. The term efficient market was first introduced into the economics literature by Fama in 1965.. For this and subsequent definitions, see.. Scope.. The term efficient market was initially applied to the stock market, but the concept was soon generalised to other asset markets.. Starting Point.. Regardless of whether or not one believes that markets are efficient, or even whether they.. are.. efficient, the efficient market hypothesis is almost certainly the right place to start when thinking about asset price formation.. One can then consider.. relative.. Two informal explanations for market efficiency.. If one could be sure that a price will rise tomorrow, the asset would be bought today, raising the price, so that it will not, in fact rise tomorrow.. Ergo, the price is unpredictable.. The intrinsic value of an asset is implied by the cumulative impact of information we receive as news.. Successive news items must be random because if an item of news were not random, that is, if it were dependent  ...   would have already picked it up.. Lo in Lo (1997).. Rational?.. Contrary to popular belief, the EMH does not require that all market participants are rational.. Indeed, markets can be efficient even when a group of investors are irrational and correlated, so long as there are some rational traders present together with arbitrage opportunities.. See Shleifer (2000).. Not Possible.. Grossman and Stiglitz (1980) argued that because information is costly, prices cannot perfectly reflect the information which is available, since if it did, those who spent resources to obtain it would receive no compensation, leading to the conclusion that an informationally efficient market is impossible.. See.. impossible.. Not Refutable.. The EMH, by itself, is not a well-defined and empirically refutable hypothesis.. Conclusion.. "I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis.. ".. Jensen (1978).. "If the efficient markets hypothesis was a publicly traded security, its price would be enormously volatile.. Shleifer and Summers (1990).. "It is disarmingly simple to state, has far-reaching consequences for academic pursuits and business practice, and yet is surprisingly resilient to empirical proof or refutation.. Lo in Lo (1997).. "Market efficiency survives the challenge from the literature on long-term return anomalies.. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal.. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique.. Fama (1998).. "What, then, can we conclude about market efficiency? Amazingly, there is still no consensus among financial economists.. Despite the many advances in the statistical analysis, databases and theoretical models surrounding the efficient markets hypothesis, the main effect has been to harden the resolve of the proponents on each side of the debate.. Lo (2000) in Cootner (1964).. Best Paper.. Fama (1970).. Best book.. "The Econometrics of Financial Markets" by Campbell, Lo and Mackinlay (1997).. Review/Survey Papers.. Fama (1991).. Dimson and Mussavian (1998).. Farmer and Lo (1999).. Beechey, Vickery and Gruen (2000).. Lo (2000).. Andreou, Pittis and Spanos (2001)..

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  • Title: EMH Definitions
    Descriptive info: EMH Definitions.. (Or moving goalposts?).. Fama (Jan.. 1965: The behavior of stock-market prices ):.. an efficient market for securities, that is, a market where, given the available information, actual prices at every point in time represent very good estimates of intrinsic values.. Fama (Sep.. Oct.. 1965: Random walks in stock market prices ):.. An efficient market is defined as a market where there are large numbers of rational, profit-maximizers actively competing, with each trying to predict future market values of individual securities, and where important current information is almost freely available to all participants.. Fama et al.. (1969):.. an efficient market, i.. , a market that adjusts rapidly to new information.. Fama (1970):.. A market in which prices always fully reflect available information is called efficient.. Jensen (1978):.. A market is efficient with respect to information set.. θ.. t.. if it is impossible to make economic profits by trading on the basis of information set.. [ By economic profits, we mean the risk adjusted returns net of all costs.. ].. Fama (1991):.. I take the market efficiency hypothesis to be the simple statement that security  ...   profits to be made) do not exceed marginal costs (Jensen (1978)).. Malkiel (1992):.. A capital market is said to be efficient if it fully and correctly reflects all relevant information in determining security prices.. Formally, the market is said to be efficient with respect to some information set,.. φ.. , if security prices would be unaffected by revealing that information to all participants.. Moreover, efficiency with respect to an information set,.. , implies that it is impossible to make economic profits by trading on the basis of.. Fama (1998):.. market efficiency (the hypothesis that prices fully reflect available information).. the simple market efficiency story; that is, the expected value of abnormal returns is zero, but chance generates deviations from zero (anomalies) in both directions.. Timmermann and Granger (2004):.. A market is efficient with respect to the information set,.. Ω.. , search technologies,.. S.. , and forecasting models,.. M.. , if it is impossible to make economic profits by trading on the basis of signals produced from a forecasting model in.. defined over predictor variables in the information set.. and selected using a search technology in..

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  • Title: Efficient Markets Hypothesis: Key Papers
    Descriptive info: Efficient Markets Hypothesis: Key Papers.. The Price Deviation Is Directly Proportional To The Square Root Of Time.. Regnault (1863) and Osborne (1959).. Martingale.. Bachelier (1900) and Samuelson (1965).. Fat Tails.. Mitchell (1915, 1921), Olivier (1926), Mills (1927), Osborne (1959), Larson (1960) and Alexander (1961).. Nonstationarity.. Kendall (1953), Houthakker (1961) and Osborne (1962).. Logs.. Osborne (1959).. Nonlinear.. Alexander (1961) and Houthakker (1961).. Scaling.. Mandelbrot (1963) (technical report 1962).. Fama (1965), Fama (1965), Fama et al.. (1969), Fama  ...   Problem.. Fama (1970).. EMH != RWT.. LeRoy (1973) and (especially) Lucas (1978).. Not Risk Neutral Implies Submartingale.. Cox and Ross (1976), Lucas (1978) and Harrison and Kreps (1979).. EMH is Impossible.. Beja (1977), (most importantly) Grossman and Stiglitz (1980) and Tirole (1982).. Different Sorts Of Efficiency.. Stiglitz (1981).. Fama (1970), Samuelson (1973), Fama (1991), Dimson and Mussavian (1998), Fama (1998), Farmer and Lo (1999), Beechey, Vickery and Gruen (2000), Lo (2000), Andreou, Pittis and Spanos (2001)..

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  • Title: Efficient Markets Hypothesis
    Descriptive info: EMH Taxonomy.. The classic taxonomy of information sets, due to Roberts (1967), and used by Fama (1970) includes the following:.. Weak Form Efficiency.. The information set includes only the history of prices.. Semi-strong Form Efficiency.. The information set includes all information known to all market participants (publicly available information).. Strong Form Efficiency.. The information set includes all information known to any market participant (private information).. Redefined by Fama (1991):.. "The 1970 review divides work on market efficiency into three categories: (1) weak-form (How well do past returns predict future returns?), (2) semi-strong-form tests (How quickly do security prices reflect public information announcements?), and (3) strong-form tests (Do any investors have private information that is not fully reflected in market prices?) At the risk of damning a good thing, I change the  ...   dividend yields and interest rates.. Since market efficiency and equilibrium-pricing issues are inseparable, the discussion of predictability also considers the cross-sectional predictability of returns, that is, tests of asset-pricing models and the anomalies (like the size effect) discovered in the tests.. Finally, the evidence that there are seasonals in returns (like the January effect), and the claim that security prices are too volatile are also considered, but only briefly, under the rubric of return predictability.. For the second and third categories, I propose xchanges in title, not coverage.. Instead of semi-strog-form tests of the adjustment of prices to public announcements, I use the now common title,.. event studies.. Instead of strong-form tests of whether specific investors have information not in market prices, I suggest the more descriptive title,.. tests for private information..

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  • Title: Efficient Markets Hypothesis: History
    Descriptive info: Efficient Markets Hypothesis: History.. Year.. 1565.. The prominent Italian mathematician, Girolamo Cardano, in.. Liber de Ludo Aleae.. (.. The Book of Games of Chance.. ) wrote: The most fundamental principle of all in gambling is simply equal conditions, e.. g.. of opponents, of bystanders, of money, of situation, of the dice box, and of the die itself.. To the extent to which you depart from that equality, if it is in your opponents favour, you are a fool, and if in your own, you are unjust.. 1828.. Scottish botanist, Robert Brown, noticed that grains of pollen suspended in water had a rapid oscillatory motion when viewed under a microscope.. 1863.. A French stockbroker, Jules Regnault, observed that the longer you hold a security, the more you can win or lose on its price variations: the price deviation is directly proportional to the square root of time.. 1876.. Samuel Benner, an Ohio farmer, authored.. Benner s Prophecies of Future Ups and Downs in Prices.. in which he wrote The price of any product is the exponent of the accumulated wisdom of the country in regard to the available supply and prospective demand for that product.. Thanks to Chris Dennistoun for this reference.. 1880.. The British physicist, Lord Rayleigh, (through his work on sound vibrations) is aware of the notion of a random walk.. 1888.. John Venn, the British logician and philosopher, had a clear concept of both random walk and Brownian motion.. 1889.. Efficient markets.. were clearly mentioned in a book by George Gibson entitled.. The Stock Markets of London, Paris and New York.. Gibson wrote that when shares become publicly known in an open market, the value which they acquire may be regarded as the judgment of the best intelligence concerning them.. 1890.. Alfred Marshall wrote.. Principles of Economics.. 1900.. A French mathematician, Louis Bachelier, published his PhD thesis,.. Théorie de la spéculation.. He developed the mathematics and statistics of Brownian motion five years before Einstein (1905).. He also deduced that.. The mathematical expectation of the speculator is zero.. 65 years before Samuelson (1965) explained efficient markets in terms of a martingale.. Bachelier s work was way ahead of his time and was ignored until it was rediscovered by Savage in 1955.. 1901.. 1902.. 1903.. 1904.. 1905.. Karl Pearson, a professor and Fellow of the Royal Society, introduced the term random walk in the letters pages of.. Nature.. Unaware of Bachelier s work in 1900, Albert Einstein developed the equations for Brownian motion.. 1906.. Bachelier.. A Polish scientist, Marian Smoluchowski, described Brownian motion.. 1907.. 1908.. Bachelier s arguments can also be found in André Barriol s book on financial transactions.. De Montessus published a book on probability and its applications, which contains a chapter on finance based on Bachelier's thesis.. Langevin authors the stochastic differential equation of Brownian motion.. 1909.. 1910.. 1911.. 1912.. George Binney Dibblee published The laws of supply and demand.. 1913.. 1914.. Bachelier published the book,.. Le Jeu, la Chance et le Hasard.. (The Game, the Chance and the Hazard), which sold over six thousand copies.. 1915.. According to Mandelbrot (1963) the first to note that distributions of price changes are too peaked to be relative to samples from Gaussian populations was Wesley C.. Mitchell.. 1916.. 1917.. 1918.. 1919.. 1920.. 1921.. W.. Taussig published a paper under the title, Is Market Price Determinate?.. 1922.. 1923.. Keynes clearly stated that investors on financial markets are rewarded not for knowing better than the market what the future has in store, but rather for risk baring, this is a consequence of the EMH.. 1924.. 1925.. Frederick MacCauley, an economist, observed that there was a striking similarity between the fluctuations of the stock market and those of a chance curve which may be obtained by throwing a dice.. 1926.. Unquestionable proof of the leptokurtic nature of the distribution of returns was given by Maurice Olivier in his Paris doctoral dissertation.. 1927.. Frederick C.. Mills, in.. The Behavior of Prices.. , proved the leptokurtosis of returns.. 1928.. 1929.. Stock-market crash in late October.. 1930.. Alfred Cowles, the American economist and businessman, founded and funded both the Econometric Society and its journal,.. Econometrica.. 1931.. 1932.. Cowles set up the Cowles Commission for Economic Research.. 1933.. Alfred Cowles 3rd analysed the performance of investment professionals and concluded that stock market forecasters cannot forecast.. 1934.. Holbrook Working concludes that stock returns behave like numbers from a lottery.. 1935.. 1936.. English economist, John Maynard Keynes has.. General Theory of Employment, Interest, and Money.. published.. He famously compares the stock market with a beauty contest, and also claims that most investors decisions can only be as a result of animal spirits.. 1937.. Eugen Slutzky shows that sums of independent random variables may be the source of cyclic processes.. In the only paper published before 1960 which found significant inefficiencies, Cowles and Jones found significant evidence of serial correlation in averaged time series indices of stock prices.. 1938.. 1939.. 1940.. 1941.. 1942.. 1943.. 1944.. In a continuation of his 1933 publication, Cowles again reported that investment professionals do not beat the market.. 1945.. 1946.. 1947.. 1948.. 1949.. Holbrook Working showed that in an ideal futures market it would be impossible for any professional forecaster to predict price changes successfully.. 1950.. 1951.. 1952.. 1953.. Milton Friedman points out that, due to arbitrage, the case for the EMH can be made even in situations where the trading strategies of investors are correlated.. Kendall analysed 22 price-series at weekly intervals and found to his surprise that they were essentially random.. Also, he was the first to note the time dependence of the empirical variance (nonstationarity).. 1954.. 1955.. Around this time, Leonard Jimmie Savage, who had discovered Bachelier s 1914 publication in the Chicago or Yale library sent half a dozen blue ditto postcards to colleagues, asking does any one of you know him? Paul Samuelson was one of the recipients.. He couldn't find the book in the MIT library, but he did discover a copy of Bachelier s Ph.. D.. thesis.. 1956.. Bachelier s name reappeared in economics, this time, as an acknowledged forerunner, in a thesis on options-like pricing by a student of MIT economist Paul A.. Samuelson.. 1957.. 1958.. Working builds an anticipatory market model.. 1959.. Harry Roberts demonstrates that a random walk will look very much like an actual stock series.. Osborne shows that the.. logarithm.. of common-stock prices follows Brownian motion; and also found evidence of the square root of time rule.. Regarding the distribution of returns, he finds a larger tangential dispersion in the data at these limits.. 1960.. Larson presents the results of application of a new method of time-series analysis.. He notes that the distribution of price changes is "very nearly normally distributed for the central 80 per cent of the data, but there is an excessive number of extreme values.. ".. Cowles revisits the results in Cowles and Jones (1937), correcting an error introduced by averaging, and.. still.. finds mixed temporal dependence results.. Working showed that the use of averages can introduce serial correlations not present in the original series.. 1961.. Houthakker uses stop-loss sell orders and finds patterns.. He also finds leptokurtosis, nonstationarity and suspects nonlinearity.. Independently of Working (1960), Alexander realised that spurious autocorrelation could be introduced by averaging; or if the probability of a rise is not 0.. 5.. He concluded that the random walk model best fits the data, but found leptokurtosis in the distribution of returns.. Also, this paper was the first to test for nonlinear dependence.. John F.. Muth introduces the.. rational expectations.. hypothesis in economics.. 1962.. Mandelbrot first proposes that the tails follow a power law, in IBM Research Note NC-87.. Paul H.. Cootner concludes that the stock market  ...   and thus is ruled out by rational expectations.. 1983.. 1984.. Osborne and Murphy find evidence of the square root of time rule in earnings.. Roll examined US orange juice futures prices and the effect of the weather.. He found excess volatility.. 1985.. Werner F.. DeBondt and Richard Thaler discovered that stock prices overreact; evidencing substantial weak form market inefficiencies.. This paper marked the start of behavioural finance.. 1986.. Marsh and Merton analyze the variance-bound methodology used by Shiller and conclude that this approach cannot be used to test the hypothesis of stock market rationality.. They also highlight the practical consequences of rejecting the EMH.. Fischer Black introduces the concept of.. noise traders.. , those who trade on anything other than information, and shows that noise trading is essential to the existence of liquid markets.. Lawrence H.. Summers argues that many statistical tests of market efficiency have very low power in discriminating against plausible forms of inefficiency.. French and Roll found that asset prices are much more volatile during exchange trading hours than during non-trading hours; and they deduced that this is due to trading on private information the market generates its own news.. 1987.. 1988.. Fama and French found large negative autocorrelations for stock portfolio return horizons beyond a year.. Lo and MacKinlay strongly rejected the random walk hypothesis for weekly stock market returns using the variance-ratio test.. Poterba and Summers show that stock returns show positive autocorrelation over short periods and negative autocorrelation over longer horizons.. Conrad and Kaul characterize the stochastic behavior of expected returns on common stock.. 1989.. Cutler, Poterba and Summers found that news does not adequately explain market movement.. Eun and Shim found that a substantial amount of interdependence exists among national stock markets, and the results are consistent with informationally efficient international stock markets.. Ball discusses the specification of stock market efficiency.. Guimaraes, Kingsman and Taylor edit the book.. A Reappraisal of the Efficiency of Financial Markets.. LeRoy publishes his survey paper, Efficient Capital Markets and Martingales.. He makes it clear that the transition between the intuitive idea of market efficiency and the martingale is far from direct.. Shiller publishes.. Market Volatility.. , a book about the sources of volatility which challenges the EMH.. 1990.. Laffont and Maskin show that the efficient market hypothesis may well fail if there is imperfect competition.. Lehmann finds reversals in weekly security returns and rejects the efficient markets hypothesis.. Jegadeesh documents strong evidence of predictable behavior of security returns and rejects the random walk hypothesis.. 1991.. Kim, Nelson and Startz reexamine the empirical evidence for mean-reverting behaviour in stock prices and find that mean reversion is entirely a pre-World War II phenomenon.. Matthew Jackson explicitly models the price formation process and shows that if agents are not price-takers, then it is possible to have an equilibrium with fully revealing prices and costly information acquisition.. Andrew W.. Lo developed a test for long-run memory that is robust to short-range dependence, and concludes that there is no evidence of long-range dependence in any of the stock returns indexes tested.. The second of Fama s three review papers.. Instead of weak-form tests, the first category now covers the more general area of.. 1992.. Chopra, Lakonishok and Ritter find that stocks overreact.. Bekaert and Hodrick characterize predictable components in excess returns on equity and foreign exchange markets.. Peter L.. Bernstein publishes the book.. Capital Ideas.. , an engaging account of the history of the ideas that shaped modern finance and laced with anecdotes.. Malkiel s essay Efficient Market Hypothesis in the.. New Palgrave Dictionary of Money and Finance.. 1993.. Jegadeesh and Titman found that trading strategies that bought past winners and sold past losers realized significant abnormal returns.. Richardson shows that the patterns in serial-correlation estimates and their magnitude observed in previous studies should be expected under the null hypothesis of serial independence.. 1994.. Roll observes that in practice it is hard to profit from even the strongest market inefficiencies.. Huang and Stoll provide new evidence concerning market microstructure and stock return predictions.. Metcalf and Malkiel find that portfolios of stocks chosen by experts do not consistently beat the market.. Lakonishok, Shleifer and Vishny provide evidence that value strategies yield higher returns because these strategies exploit the suboptimal behavior of the typical investor and not because these strategies are fundamentally riskier.. 1995.. Haugen publishes the book.. The New Finance: The Case Against Efficient Markets.. He emphasizes that short-run overreaction (which causes momentum in prices) may lead to long-term reversals (when the market recognizes its past error).. 1996.. Brian Arthur,.. et al.. propose a theory of asset pricing by creating an artificial stock market with heterogeneous agents with endogenous expectations.. Campbell, Lo and MacKinlay publish their seminal book on empirical finance,.. The Econometrics of Financial Markets.. Chan, Jegadeesh and Lakonishok look at momentum strategies and their results suggest a market that responds only gradually to new information.. 1997.. Andrew Lo edits two volumes that bring together the most influential articles on the EMH.. Chan, Gup and Pan conclude that the world equity markets are weak-form efficient.. Dow and Gorton investigate the connection between stock market efficiency and economic efficiency.. 1998.. Elroy Dimson and Massoud Mussavian give a brief history of market efficiency.. In his third of three reviews, Fama concludes that, Market efficiency survives the challenge from the literature on long-term return anomalies.. 1999.. Lo and MacKinlay publish.. A Non-Random Walk Down Wall Street.. Bernstein criticizes the EMH and claims that the marginal benefits of investors acting on information exceed the marginal costs.. Zhang presents a theory of marginally efficient markets.. Farmer and Lo publish an excellent but brief review article.. 2000.. Shleifer publishes.. Inefficient Markets: An Introduction to Behavioral Finance.. , which questions the assumptions of investor rationality and perfect arbitrage.. Lo publishes a selective survey of finance.. Beechey, Vickery and Gruen s survey paper.. Shiller publishes the first edition of.. Irrational Exuberance.. , which challenges the EMH, demonstrating that markets cannot be explained historically by the movement of company earnings or dividends.. 2001.. Eugene Fama became the first elected fellow of the American Finance Association.. In an excellent historical review paper, Andreou, Pittis and Spanos trace the development of various statistical models proposed since Bachelier (1900), in an attempt to assess how well these models capture the empirical regularities exhibited by data on speculative prices.. Mark Rubinstein reexamines some of the most serious historical evidence against market rationality and concludes that markets are rational.. Shafer and Vovk publish.. Probability and Finance: It s Only a Game!.. which shows how probability can be based on game theory; they then apply the framework to finance.. 2002.. Lewellen and Shanken conclude that parameter uncertainty can be important for characterizing and testing market efficiency.. Chen and Yeh investigate the emergent properties of artificial stock markets and show that the EMH can be satisfied with some portions of the artificial time series.. 2003.. Malkiel examines the attacks on the EHM and concludes that our stock markets are far more efficient and far less predictable than some recent academic papers would have us believe.. G.. William Schwert shows that when anomalies are published, practitioners implement strategies implied by the papers and the anomalies subsequently weaken or disappear.. In other words, research findings cause the market to become more efficient.. 2004.. Timmermann and Granger discuss the EMH from the perspective of a modern forecasting approach.. 2005.. Malkiel shows that professional investment managers do not outperform their index benchmarks and provides evidence that by and large market prices do seem to reflect all available information.. 2006.. Blakey looked at some of the causes and consequences of random price behaviour.. Tóth and Kertész found evidence of increasing efficiency in the New York Stock Exchange..

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  • Title: Random Walk Hypothesis
    Descriptive info: Random Walk Hypothesis.. Characterization of financial time series.. Research Note RN/11/01, University College London, London.. Stochastic process.. Description.. Applicability to real markets.. Notes.. diffusion process.. satisfies the diffusion equation.. poor.. Regnault (1863) and Osborne (1959) discovered that price deviation is proportional to the square root of time, but the nonstationarity found by Kendall (1953), Houthakker (1961) and Osborne (1962) compromises the significance of the process.. Gaussian process.. increments normally distributed.. Financial markets exhibit leptokurtosis (Mitchell (1915, 1921), Olivier (1926), Mills (1927), Osborne (1959), Larson (1960), Alexander (1961)).. Lévy process.. stationary independent increments.. Kendall (1953), Houthakker (1961) and Osborne (1962) found nonstationarities in markets in the form of positive autocorrelation in the variance of returns.. Markov process.. memoryless.. Kendall (1953), Houthakker (1961) and Osborne (1962) found positive autocorrelation in the variance of returns.. zero expected return.. submartingale: good for stock market.. Bachelier (1900) and Samuelson (1965) recognised the importance of the martingale in  ...   market this implies that the price of a stock follows a submartingale (a martingale being a special case when investors are risk-neutral).. random walk.. discrete version of Brownian motion.. LeRoy (1973) and (especially) Lucas (1978) pointed out that a random walk is neither necessary nor sufficient for an efficient market.. Wiener process/Brownian motion.. continuous-time, Gaussian independent increments.. Bachelier (1900) developed the mathematics of Brownian motion and used it to model financial markets.. Note that Brownian motion is a diffusion process, a Gaussian process, a Lévy process, a Markov process and a martingale.. On the one hand this makes it a very strong condition (and therefore the least realistic), on the other hand it makes it a very important generic stochastic process and is therefore used extensively for modelling financial markets (for example, see Black and Scholes (1973)).. Note that above we are interested in the.. of the price of an asset (Osborne (1959))..

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  • Title: Efficient Markets Hypothesis: Joint Hypothesis
    Descriptive info: Efficient Markets Hypothesis: Joint Hypothesis.. Important paper: Fama (1970).. An efficient market will always fully reflect available information, but in order to determine how the market should fully reflect this information, we need to determine investors risk preferences.. Therefore, any test of the EMH is a test of both market efficiency and investors risk preferences.. For this reason, the EMH, by itself, is not a well-defined and empirically refutable hypothesis.. Sewell (2006).. "First, any test of efficiency must assume an equilibrium model that defines normal security returns.. If efficiency is rejected, this could be because the market is truly inefficient or because an incorrect equilibrium model has been assumed.. This.. joint hypothesis.. problem means that market efficiency as such can never be rejected.. Campbell, Lo and MacKinlay (1997), page 24.. ".. any test of the EMH is a joint test of an equilibrium returns model and rational expectations (RE).. Cuthbertson (1996).. "The notion of market efficiency is not a well-posed and empirically refutable hypothesis.. To make it operational, one must specify additional structure, e.. , investors preferences, information structure, etc.. But then a test of market efficiency becomes a test of several auxiliary hypotheses as well, and a rejection of such  ...   are inefficient, or is it due to risk aversion, or dividend smoothing? All three inferences are consistent with the data.. Moreover, new statistical tests designed to distinguish among them will no doubt require auxiliary hypotheses of their own which, in turn, may be questioned.. Lo in Lo (1997), page.. xvii.. "For the CAPM or the multifactor APT to be true, markets must be efficient.. "Asset-pricing models need the EMT.. However, the notion of an efficient market is not affected by whether any particular asset-pricing theory is true.. If investors preferred stocks with a high unsystematic risk, that would be fine: as long as all information was immediately reflected in prices, the EMT theory would be true.. Lofthouse (2001), page 91.. "One of the reasons for this state of affairs is the fact that the Efficient Markets Hypothesis, by itself, is not a well-defined and empirically refutable hypothesis.. , investor preferences, information structure, business conditions, etc.. But then a test of the Efficient Markets Hypothesis becomes a test of several auxiliary hypotheses as well, and a rejection of such a joint hypothesis tells us little about which aspect of the joint hypothesis is inconsistent with the data.. Lo and MacKinlay (1999), pages 6-7..

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  • Title: Efficient Markets Hypothesis: Impossible
    Descriptive info: Efficient Markets Hypothesis: Impossible.. "Second, perfect efficiency is an unrealistic benchmark that is unlikely to hold in practice.. Even in theory, as Grossman and Stiglitz (1980) have shown, abnormal returns will exist if there are costs of gathering and processing information.. These returns are necessary to compensate investors for their information-gathering and information-processing expenses, and are no longer abnormal when these expenses are properly accounted for.. In a large and liquid market, information costs are likely to justify only small abnormal returns, but it is difficult to say how small, even if such costs could be measured precisely.. "Grossman (1976)  ...   are perfectly efficient, the return to gathering information is nil, in which case there would be little reason to trade and markets would eventually collapse.. Alternatively, the degree of market.. inefficiency.. determines the efforrt investors are willing to expend to gather and trade on information, hence a non-degenerate market equilibrium will arise only when there are sufficient profit opportunities, i.. , inefficiencies, to compensate investors for the costs of trading and information-gathering.. The profits earned by these industrious investors may be viewed as economic rents that accrue to those willing to engage in such activities.. Lo and MacKinlay (1999), pages 5-6..

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  • Title: Efficient Markets Hypothesis and Random Walk Books
    Descriptive info: Efficient Markets Hypothesis and Random Walk Books.. BERNSTEIN, Peter L.. , 1992.. Capital Ideas : The Improbable Origins of Modern Wall Street.. [.. Cited by 205.. ] (14.. 39/year).. CAMPBELL, John Y.. , Andrew W.. LO and A.. Craig MacKINLAY, 1997.. Cited by 2554.. ] (276.. 36/year).. COOTNER, Paul H.. (Edited by), 1964.. Cited by 270.. ] (6.. 24/year).. CUTHBERTSON, Keith, 1996.. Quantitative Financial Economics: Stocks, Bonds and Foreign Exchange.. Cited by 74.. ] (22.. 83/year).. DOOB, J.. L.. , 1953.. Stochastic Processes.. , New York: Wiley.. Cited by 2254.. ] (130.. 73/year).. GIBSON, George, 1889.. New York: G.. P.. Putnam's Sons.. Cited by 3.. ] (0.. 03/year).. GUIMARÃES, Rui M.. C.. , Brian G.. KINGSMAN and Stephen J.. TAYLOR (eds), 1989.. Berlin: Springer-Verlag.. Cited by 6.. 33/year).. HAUGEN, Robert A.. , 1995.. The New Finance: The Case against Efficient Markets.. (Englewood Cliffs, NJ: Prentice Hall.. [not cited] (0.. 00/year).. LO, Andrew W.. (Edited by), 1997.. Market  ...   Cited by 528.. ] (46.. 97/year).. MANDELBROT, Benoit B.. , 1997.. Fractals and Scaling in Finance: Discontinuity, Concentration, Risk.. Cited by 583.. ] (56.. 93/year).. SEYHUN, H.. N.. , 1998.. Investment Intelligence From Insider Trading.. Cambridge: MIT Press.. Cited by 82.. ] (8.. 87/year).. SHAFER, Glenn and Vladimir VOVK, 2001.. , John Wiley Sons, Inc.. Cited by 91.. 58/year).. SHLEIFER, Andrei, 2000.. Cited by 577.. ] (79.. 68/year).. SMITH, A.. , 1968.. The Money Game.. , Random House, New York.. Cited by 7.. 18/year).. SPITZER, Frank, 1976.. Principles of Random Walk.. Cited by 797.. ] (127.. 69/year).. TAYLOR, Stephen J.. , 2005.. Asset Price Dynamics, Volatility, and Prediction.. Cited by 11.. ] (4.. 91/year).. For books on anomalies, see.. books on behavioural finance.. Book Reviews.. HARVEY, Campbell R.. ,.. The Journal of Finance.. 53.. (2), 803 806.. TISO, Maurizio, 1998.. The Review of Financial Studies.. 11.. (1), 233 238.. WHITELAW, Robert F.. Macroeconomic Dynamics.. 2.. , 559 562..

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  • Title: Efficient Markets Hypothesis: Bibliography
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  • Archived pages: 14