EMH Flashcards
Kendall
(1953)
tracked stock and bond prices over a period, and found that prices followed a ‘random walk,’ i.e. correlations of successive price movements were close to zero (so likely not to contain any other information). They must be: if they were expected to persist, the trend would self-destruct and jump.
Jegadeesh and Titman
(1993)
anomaly against the weak form: the momentum effect/strategy. Stocks that have performed relatively well (poorly) over the past 3 to 12 months continue to do well (poorly) over the next 3 to 12 months. → price movements can be successive and trends can (and do) exist
EMH and HFT
High frequency traders become the middlemen, the transaction costs themselves.
They violate homogenous information (able to use it faster) and can thus make profits in weak form.
Fama
(1991):
Semi-Strong has the “cleanest” effect on market efficiency, since prices do jump instantaneously to new information attributed to a precise date and time.
Implications of different forms on how to beat the market
Weak: Can beat with fundamentals analysis
Semi-Strong: can be
Strong: Cosistently beating the market is not possible. Lucky/unlucky is possible.
Malkiel
(2005): Professional investors do not beat the market; especially, actively managed mutual funds do not consistently outperform comparably benchmark indices, i.e. true that you can’t beat the market
Over a 10-year period ending December 31, 2002, over 80% of the actively managed funds underperformed the index.
HOWEVER, THIS IS AFTER FEES.
Grossman and Stiglitz
(1980)
Strong form is impossible. If information is costly, then free-rider problem occurs, where each agent will want to let others become informed to make the market more efficient, since efficiency is dependent on the information of individuals. But then no one chooses to get informed. But if really no one was informed, it would pay for someone to become informed → no competitive equilibrium.
→ Prices cannot perfectly reflect available information (since because information is costly, if it did, those spent resources on it would receive no compensation) → but people do pay for information
Wachtel
Consider the ‘January effect’ where small stocks normally outperform the market
EMH And Behaivioral finance
Any form of EMH can be rejected in favor of behavioral finance, where investors can be overcome with ‘animal spirits.’ Given any set of information, a price may not truly reflect just that information, but may also reflect investor sentiment.
Top hedge funds
Even if some money managers are consistently observed to beat the market, no refutation even of strong-form efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen “star” performers
Keynes quote
“Markets can stay irrational longer than you can stay solvent”
I.e. rational investors have difficulty profiting by shorting irrational bubbles
Flash Crash
Black Monday (1987)
07 Crash
Bubble examples
Lo and MacKinlay
1999
Book called A Non-Random Walk Down Wall Street
Argues that argue that a random walk does not exist, nor ever has
Behavioural finance sources
Shiller?
Find some more
Carhat
1997
Using a sample free of survivor bias,
Most funds underperform by about the magnitude of their investment expenses
My analysis indicates that Jegadeesh and Titman’s (1993) one-year momentum in stock returns accounts for Hendricks, Patel, and Zeckhauser’s (1993) hot hands
