The Efficient Market Hypothesis and Its Critics

Malkiel, Burton G.

doi:10.1257/089533003321164958

Cited by 1,434 publications

(833 citation statements)

References 35 publications

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“…Indeed, this is a minimal requirement for any predictive market model (see [Malkiel 2003]). In [Cross et al 2007] it was shown that there is no statistically significant difference between the the investment performance of agents with differing herding propensities C i (and hence nothing to be gained by adaptively changing their reaction to herding).…”

Section: B Rational Expectations and Efficient Marketsmentioning

confidence: 99%

“…We have demonstrated that boom-bust dynamics is one possibility that arises naturally and robustly without requiring any exogenous cause. However, 31 There is no clear consensus as to whether technical trading actually produces excess profits [Brock, Lakonishok and LeBaron 1992, Chan, Jegadeesh and Lakonishok 1996, Malkiel 2003 but if some strategies do indeed work then another interesting question is why? It may be caused by the presence of one or more systemic deviations from full rationality or it may in fact be a selffulfilling prophesy caused by sufficient numbers of technical traders using that rule themselves.…”

Section: Implications and Concluding Remarksmentioning

confidence: 99%

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Implausible Equilibrium Solutions in Economics and Finance

Lamba

2014

SSRN Journal

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When modelling the aggregate behavior of a population over long periods of time the standard approach is to consider the system as always being in equilibrium -using averaging procedures based upon assumptions of rationality, utility-maximization and a high degree of independence amongst the agents. These analytically tractable models are fully determined by a small number of variables and the future evolution of the system is decoupled from its past. Previous studies [Akerlof and Yellen 1985, Scharfstein andStein 1990] suggested that allowing a subset of the agents to be nonmaximizing might shift the equilibrium solution but a shortcoming in those analyses prevented the possibility of non-equilibrium solutions.We show how equilibrium assumptions and solutions can be 'stresstested' by embedding the models within frameworks capable of far-fromequilibrium dynamics. This procedure is applied to Brownian motion (Random walk) asset pricing which serves as our prototypical equilibrium model.The introduction of a simple, yet plausible, form of non-maximizing coupling between the agents results in endogenous fluctuations that destabilize the equilibrium solution. These fluctuations typically consist of long periods of increasingly severe mispricing followed by rapid, unannounced, corrections. Importantly, this occurs at realistic parameter values and is consistent with the observed price dynamics of real markets. Furthermore the mispricing phase may be mistaken for a trend in the fundamentals of the equilibrium model. We argue that the 'boom-bust' nature of the destabilizing endogenous dynamics is likely to be prevalent in economic systems at all scales. All the mainstream schools of economic thought and, in turn, modern finance have been strongly motivated by the mathematical elegance and predictive success of Newtonian mechanics and statistical physics. This has resulted in mathematical models constructed so that the solution is a stable, usually unique, equilibrium described by a small number of variables and whose future evolution is independent of its past states. Indeed the notion of equilibrium has become a unifying concept in modern economics although its precise meaning varies with context. Here we shall consider those equilibrium models that attempt to describe systems involving large numbers of interacting agents over significant periods of time. Some examples, discussed briefly below, include the supply-demand curves of microeconomics, the Brownian motion description of asset prices, and the DSGE models used in macroeconomics and central banking.In the physical sciences, equilibria are most often studied as the limiting values of dynamical systems where the short-term transient behavior may not even be of interest. However, economic systems have no such end-state [Robinson 1974] and so the only remaining (legitimate) justification for equilibrium models requires the assumption that equilibrating processes operate (and dominate) over timescales shorter than or comparable to any exogenous changes. Th...

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Section: B Rational Expectations and Efficient Marketsmentioning

confidence: 99%

Section: Implications and Concluding Remarksmentioning

confidence: 99%

Implausible Equilibrium Solutions in Economics and Finance

Lamba

2014

SSRN Journal

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“…Therefore, the found predictability could be attributed to the intervention of the big traders at specific (yet unknown) threshold values. The EMH is confirmed whenever apparently profitable trading strategies are ruled out by market friction (Malkiel, 2003), in other words, some statistically significant anomalies are not economically significant. If the level of transaction costs needed to generate profits from an anomaly (therefore, eliminating it) is far below the level that actually exists in the market, it could explain why a reasonably efficient market allows the anomaly to exist (Wu and Shafer 2007).…”

Section: Discussionmentioning

confidence: 86%

Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm

et al. 2008

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Universal compression algorithms can detect recurring patterns in any type of temporal data -including financial data -for the purpose of compression. The universal algorithms actually find a model of the data that can be used for either compression or prediction. We present a universal Variable Order Markov (VOM) model and use it to test of the weak form of the Efficient Market Hypothesis (EMH).The EMH is tested for 12 pairs of international intra-day currency exchange rates for one year series of 1,5,10,15,20,25 and 30 minutes. Statistically significant compression is detected in all the time-series and the high frequency series are also predictable above random. However, the predictability of the model is not sufficient to generate a profitable trading strategy, thus, Forex market turns out to be efficient, at least most of the time.

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“…The conventional study on the market efficiency hypothesis focuses on whether stock markets are of weak, semi-strong, or strong form efficiency. The empirical evidence has been mixed (Fama, 1970(Fama, & 1998Malkiel, 2003). This study contributes to the market efficiency literature by looking at whether a stock market becomes more efficient in a long-run in terms of a measure of market information asymmetry-the average discount rate for all firms in the market.…”

Section: Introductionmentioning

confidence: 99%

Has the Stock Market Become More Efficient in the Long-Run? Evidence from U.S Corporations

Chen¹,

Feng²,

Marcus³

2015

JFE

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Using the cointegration model to deal with nonstationary time series, we estimate the long-run relationship between the average stock price and the average dividend. The results from U.S. time series data of 141 years show that the discount rate is lower in the second half of this period, which indicates that stock market becomes more efficient and capital cost becomes lower in the long run. Along with well-documented narrowing of the bid-ask spreads of stocks over time and the growing speed of stock market order fulfillment, market efficiency is further exemplified by lower dividend yields. JEL Classification: G10, C58

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The Efficient Market Hypothesis and Its Critics

Cited by 1,434 publications

References 35 publications

Implausible Equilibrium Solutions in Economics and Finance

Implausible Equilibrium Solutions in Economics and Finance

Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm

Has the Stock Market Become More Efficient in the Long-Run? Evidence from U.S Corporations

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