The Efficient Market Hypothesis and Its Critics

In the paper

“However, they also found that returns in the next period were similar for both groups, so they could not confirm that a contrarian approach would yield higher-thanaverage returns.”

What the sources say

• Not checked yetcites Fluck, Malkiel and Quandt (1997)

In the paper

“There was a statistically strong pattern of return reversal, but not one that implied an inefficiency in the market that would enable investors to make excess returns.”

What the sources say

• Not checked yetcites Fluck, Malkiel and Quandt (1997)

In the paper

“From the mid1980s through the decade of the 1990s, there has been no gain from holding smaller stocks. Indeed, in most world markets, larger capitalization stocks produced larger rates of return.”

In the paper

“In general, the exhibit shows that investors have earned a higher rate of return from the stock market when they purchased a market basket of equities with an initial dividend yield that was relatively high, and relatively low future rates of return when stocks were purchased at low dividend yields.”

In the paper

“Professional pension-fund and mutual fund managers over-weighted their portfolios with high-tech stocks.”

In the paper

“We know now, with the benefit of hindsight, that outlandish and unsupportable claims that being made regarding the growth of the Internet (and the related telecommunications structure needed to support it).”

In the paper

“But even here, when we know after the fact that major errors were made, there were certainly no arbitrage opportunities available to rational investors before the bubble popped.”

In the paper

“As Palm Pilot began trading, enthusiasm for the shares was so great that the 95 percent of its shares still owed by 3-Com had a market value considerably more than the entire market capitalization of 3-Com, implying that all the rest of its business had a negative value.”

In the paper

“Many of Wall Street's most respected security analysts, including those independent of investment banking firms, were recommending Internet stocks to the firm's institutional and individual clients as being fairly valued.”

In the paper

“The 'anomaly' disappeared once 3-Com spun off more of Palm stock.”

In the paper

“Initially, only 5 percent of the Palm Pilot shares were distributed to the public; the other 95 percent remained on 3-Com's balance sheet.”

In the paper

“while stock prices eventually did adjust to levels that more reasonably reflected the likely present value of their cash flows”

In the paper

“We know now that projections for the rates and duration of growth of these for 'new economy' companies were unsustainable.”

In the paper

“While it is now clear in retrospect that such professionals were egregiously wrong, there was certainly no obvious arbitrage opportunity available.”

In the paper

“But remember, it was the sharp-pencilled professional investors who argued that the valuations of high-tech companies were proper.”

In the paper

“Undoubtedly, some market participants are demonstrably less then rational.”

In the paper

“However, the finding of mean reversion is not uniform across studies and is quite a bit weaker in some periods than it is for other periods.”

In the paper

“Odean (1999) suggests that momentum investors do not realize excess returns. Quite the opposite - a sample of such investors suggests that such traders did far worse than buy-and-hold investors even during a period where there was clear statistical evidence of positive momentum.”

What the sources say

• Not checked yetcites Odean (1999)

In the paper

“The statistical dependencies giving rise to momentum are extremely small and are not likely to permit investors to realize excess returns.”

In the paper

“I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe.”

• Also stated in: § Burton G. Malkiel Abstract · p. 4 · boosted

  “I conclude that our stock markets are far more efficient and far less predictable than some recent academic papers would have us believe.”

In the paper

“He also shows that many of the return 'anomalies' arise only in the context of some very particular model, and that the results tend to disappear when exposed to different models for expected 'normal' returns, different methods to adjust for risk, and when different statistical approaches are used to measure them.”

What the sources say

• Not checked yetcites Eugene Fama (1998)

In the paper

“Fama finds that apparent underreaction to information is about as common as overreaction, and post-event continuation of abnormal returns is as frequent as post-event reversals.”

What the sources say

• Not checked yetcites Eugene Fama (1998)

In the paper

“There also appear to be a number of day-of-the-week effects. For example, French (1980) documents significantly higher Monday returns.”

What the sources say

• Not checked yetcites French (1980)

In the paper

“A number of researchers have found that January has been a very unusual month for stock market returns. Returns from an equally weighted stock index have tended to be unusually high during the first two weeks of the year. The return premium has been particularly evident for stocks with relatively small total capitalizations (Keim, 1983).”

What the sources say

• Not checked yetcites Keim, 1983

In the paper

“Indeed, the U.S. stock market is almost unique in that it is one of the few world markets that remained in continuous operation during the entire period and the measured risk premium results, in part, from survivorship bias.”

In the paper

“There also appear to be some patterns in returns around the turn of the month (Lakonishok and Smidt, 1988), as well as around holidays (Ariel, 1990).”

What the sources say

• Not checked yetcites Lakonishok and Smidt, 1988
• Not checked yetcites Ariel, 1990

In the paper

“Campbell and Shiller (1998) report that initial P/E ratios explained as much as 40 percent of the variance of future returns. They conclude that equity returns have been predictable in the past to a considerable extent.”

What the sources say

• Not checked yetcites Campbell and Shiller (1998)

In the paper

“Eugene Fama and Kenneth French (2002) argue that the high average realized returns result in part from large unexpected capital gains.”

What the sources say

• Not checked yetcites Fama and French (2002)

In the paper

“For example, using the Ibbotson data from 1926 through 2001, common stocks have produced rates of retain of approximately 10½ percent while high grade bonds have returned only about 5½ percent.”

What the sources say

• Not checked yetcites Ibbotson data

In the paper

“For example, Fama and French (1993) suggest that the price-to-book value ratio may reflect another risk factor that is priced into the market and not captured by CAPM.”

What the sources say

• Not checked yetcites Fama and French (1993)

In the paper

“Fama and French suggest that size may be a far better proxy for risk than beta, and therefore that their findings should not be interpreted as indicating that markets are inefficient.”

What the sources say

• Not checked yetcites Fama and French

In the paper

“Moreover, if stocks are divided up by beta deciles, ten portfolios constructed by size display the same kind of positive relationship shown in Exhibit 2. On the other hand, within size deciles, the relationship between beta and return continues to be flat.”

What the sources say

• Not checked yetcites Fama and French

In the paper

“But these findings do not necessarily imply inefficiency. They may simply indicate failure of the CAPM to capture all the dimensions of risk.”

In the paper

“And it is far from clear that any of these results can be used to generate profitable trading strategies.”

In the paper

“Moreover, these non-random effects (even if they were dependable) are very small relative to the transactions costs involved in trying to exploit them. They do not appear to offer arbitrage opportunities that would enable investors to make excess risk-adjusted returns.”

In the paper

“Fama and French (1993) argue that a three-factor asset-pricing model (including price-to-book-value and size as measures of risk) is the appropriate benchmark against which anomalies should be measured.”

What the sources say

• Not checked yetcites Fama and French (1993)

In the paper

“Fama and French (1992) concluded that size and price-to-book-value together provide considerable explanatory power for future returns and once they are accounted for, little additional influence can be attributed to P/E multiples.”

What the sources say

• Not checked yetcites Fama and French (1992)

In the paper

“I believe that this finding is simply the result of a combination of perceived equity risk being considerably higher during the early years of the period and of average equity returns being much higher than had been forecast by investors.”

In the paper

“researchers such as Ross (2001) have suggested that they can largely be explained by fund management fees.”

What the sources say

• Not checked yetcites Ross (2001)

In the paper

“Datamining problems are unique to nonexperimental sciences, such as economics, which rely on statistical analysis for their insights and cannot test hypotheses by running repeated controlled experiments.”

In the paper

“some of the patterns based on fundamental valuation measures of individual stocks may simply reflect better proxies for measuring risk.”

In the paper

“Equity valuations rest on uncertain future forecasts.”

In the paper

“Surely, if market prices were determined by irrational investors and systematically deviated from rational estimates of the present value of corporations, and if it was easy to spot predictable patterns in security returns or anomalous security prices, then professional fund managers should be able to beat the market.”

In the paper

“Surely, the remarkable market values assigned to internet and related high-tech companies seem inconsistent with rational valuation.”

In the paper

“Moreover, the potential profits from name or ticker symbol confusion are extremely small relative to the transactions costs that would be required to exploit them.”

In the paper

“Significant effects are likely to be published in professional journals while negative results, or boring confirmations of previous findings, are relegated to the file drawer or discarded.”

In the paper

“Certainly, the extent of the bubble was only clear in retrospect.”

In the paper

“Fortunately, 'bubble' periods are the exception rather than the rule”

In the paper

“Economists such as Shiller have suggested that during the early 2000s, the ex ante equity risk premium was, if anything, irrationally too low.”

What the sources say

• Not checked yetcites Shiller

In the paper

“many 'anomalies' and statistically significant predictable patterns in the stock returns have been uncovered in the literature.”

In the paper

“these patterns are not robust and dependable in different sample periods”

In the paper

“Undoubtedly, with the passage of time and with the increasing sophistication of our databases and empirical techniques, we will document further apparent departures from efficiency and further patterns in the development of stock returns.”

In the paper

“Moreover, whatever patterns or irrationalities in the pricing of individual stocks that have been discovered in a search of historical experience are unlikely to persist and will not provide investors with a method to obtain extraordinary returns.”

In the paper

“The record of professionals does not suggest that sufficient predictability exists in the stock market or that there are recognizable and exploitable irrationalities sufficient to produce excess returns.”

In the paper

“Moreover, the market cannot be perfectly efficient or there would be no incentive for professionals to uncover the information that gets so quickly reflected in market prices, a point stressed by Grossman and Stiglitz (1980).”

What the sources say

• Not checked yetcites Grossman and Stiglitz (1980)

In the paper

“But I suspect that the end result will not be an abandonment of the belief of many in the profession that the stock market is remarkably efficient in its utilization of information.”

In the paper

“If any $100 bills are lying around the stock exchanges of the world, they will not be there for long.”

In the paper

“He found that active mutual fund managers were unable to add value and, in fact, tended to underperform the market by approximately the amount of their added expenses.”

What the sources say

• Not checked yetcites Jensen (1969)

In the paper

“Periods such as 1999 where 'bubbles' seem to have existed, at least in certain sectors of the market, are fortunately the exception rather than the rule.”

In the paper

“As a result, pricing irregularities and predictable patterns in stock returns can appear over time and even persist for short periods.”