Disproving EMH

Question 1

Ball and Brown 1968

Answer 1

Undereaction - markets adjust before
announcement giving an Undereaction - shows that publicly available info predicts the announcement before its made - net income is computed using lots of smaller components

Question 2

Shiller 1981

Answer 2

Argues against EMH as share price volatility is too volatile to be made by a group of rational investors using the same info announcement - shows significant price deviations

Question 3

Bank 1981

Answer 3

The size effect - showed an 8.5% difference in return in favour of low P/BV over high P/BV - higher returns relative to price in low P/BV stocks indicates mispricing or over confidence/conservatism in high P/BV as seen as more resilient to shocks - more liquid

Question 4

Keim 1983

Answer 4

Showed that the size effect was most pronounced in January where Rozeff and Kinney 1976 showed average return deviance in January for the market as a whole

Question 5

Rozeff and Kinney 1976

Answer 5

The January effect shows that portfolios generate average 3% more return the other months average of 0.5% return - underpriced in january

Question 6

Branch 1977

Answer 6

Explanation fr January effect - tax loss selling in December so investors crystalise their losses to maximise capital gains. Although new investment vehicles not affected by capital gains tax - ISAs

Question 7

French 1980

Answer 7

Day of the week effect - consistently find -ve returns on Mondays which appear correlated to Friday - autocorrelation of -ve returns on friday leading to an irrational market reaction emphasising the abnormal return giving a price misalignment - weak form efficiency should discount this effect - depends what size stock it happens in and what beta