TAILIEUCHUNG - The Efficient Market Hypothesis and Its Critics

Motivated by these issues, we study the comovements between the returns on country-industry portfolios and country-style portfolios for 23 countries, 26 industries, and nine styles during 1980–2005. During this period, markets are likely to have become more integrated at the world level through increased capital and trade integration. Also, a number of regional developments have likely integrated stockmarkets at a regional level. These developments include the North American Free Trade Agreement (NAFTA), the emergence of the euro, and increasing economic and financial integration within the European Union. To test whether these developments have led to permanent changes in stock return comovements, we rely on the trend tests of Vogelsang. | The Efficient Market Hypothesis and Its Critics by Burton G. Malkiel Princeton University CEPS Working Paper No. 91 April 2003 I wish to thank J. Bradford De Long Timothy Taylor and Michael Waldman for their extremely helpful observations. While they may not agree with all of the conclusions in this paper they have strengthened my arguments in important ways. The Efficient Market Hypothesis and Its Critics Burton G. Malkiel Abstract Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behavioral elements of stock-price determination and by econometricians who argue that stock returns are to a considerable extent predictable. This survey examines the attacks on the efficient-market hypothesis and the relationship between predictability and efficiency. I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe. 2 A generation ago the efficient market hypothesis was widely accepted by academic financial economists for example see Eugene Fama s 1970 influential survey article Efficient Capital Markets. It was generally believed that securities markets were extremely efficient in reflecting information about individual stocks and about the stock market as a whole. The accepted view was that when information arises the news spreads very quickly and is incorporated into the prices of securities without delay. Thus neither technical analysis which is the study of past stock prices in an attempt to predict future prices nor even fundamental analysis which is the analysis of financial information such as company earnings asset values etc. to help investors select undervalued stocks would enable an investor to achieve returns greater than those that could be obtained by holding a randomly selected portfolio of individual .

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• motivations include fear
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