A Broad-Spectrum Computational Approach for Market Efficiency
AbstractThe Efficient Market Hypothesis (EMH) is one of the most investigated questions in Finance. Nevertheless, it is still a puzzle, despite the enormous amount of research it has provoked. For instance, it is still discussed that market cannot be outperformed in the long run (Detry and Gregoire, 2001), persistent market anomalies cannot be easily explained in this theoretical framework (Shiller, 2003) and some talented hedge-fund managers keep earning excess risk-adjusted rates of returns regularly. We concentrate in this paper on the weak form of efficiency(Fama, 1970). We focus on the efficacity of simple technical trading rules, following a large research stream presented in Park and Irwin (2004). Nevertheless, we depart from previous works in many ways : we first have a large population of technical investment rules (more than 260.000) exploiting real-world data to manage a financial portfolio. Very few researches have used such a large amount of calculus to examine the EMH. Our experimental design allows for strategy selection based on past absolute performance. We take into account the data-snooping risk, which is an unavoidable problem in such broad-spectrum researches, using a rigorous Bootstrap Reality Check procedure. While market inefficiencies, after including transaction costs, cannot clearly be successfully exploited, our experiments present troubling outcomes inviting close re-consideration of the weak-form EMH.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2006 with number 492.
Date of creation: 04 Jul 2006
Date of revision:
efficient market hypothesis; large scale simulations; bootstrap;
Find related papers by JEL classification:
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-07-15 (All new papers)
- NEP-CMP-2006-07-15 (Computational Economics)
- NEP-ETS-2006-07-15 (Econometric Time Series)
- NEP-FIN-2006-07-15 (Finance)
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