The Efficient Market Hypothesis

There are several flavors of the efficient market hypothesis. We will consider three:

• Weak EMH. "One can not use past price and volume values to craft investment strategies that can reliably out perform the over all market."
• Semi-Strong EMH. "One cannot use publically available information to to craft investment strategies that can reliably out perform the over all market."
• Strong EMH. "One cannot use any information --- including material, non-public information --- to to craft investment strategies that can reliably out perform the over all market."

I may edit these as the course goes along, and they may differ a bit from the conventional phrasing. Still, they should serve well enough to provide a concrete basis for a constructive conversation.

Two Useful Surveys

First, I warmly recommend that you read the 2004 survey paper by Andy Lo from the Journal of Portfolio Theory. This is the quickest route I know to the state of current theory and practice.

Andrew Lo, The Adaptive Markets Hypothesis: Market Efficieny from an Evolutionary Perspective, Journal of Porfolio Theory, 2004.

Second, there is a easy-to-read essay by Malkiel that is well worth your time. I would not really call it a paper on the efficinent market hypothesis, but it does give a usuful survey of work that suggests that it it quite hard for an active manager to do as well as an indexer --- except for the fees he makes, of course.

Burton Malkiel The Efficient Market Hypothesis and It's Critics (Journal of Economic Perspectives, 17 (1), pp.59 – 82, 2003.

Some further references that I may mention in class...

Clive Granger Forcasting Stockmarket Prices: Lessons for Forecasters. (International Journal of Forecasting, 8, pp. 3--13, 1992.)

Harrision Hong and Jerremy Stein, Simple Forecasts and Paradigm Shifts (NBER Report)

You can use Google Scholar to find a vast number of related articles. BTW, if you use the plain vanilla version of Google, you will find even more material, but the much of it will be junk. Google Scholar is a great gift to the serious student.