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The case for market inefficiency: Investment style and market pricing

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Abstract

The level of informational efficiency of security markets has been a contentious issue among the academic and broader community over the last 35 years. This study highlights the growth in popularity in investment styles over this period, where investment decisions are made with only limited reference to available information and no concern with fair value (eg momentum investors and index investors). This paper models the market behaviour of fundamental, momentum and index investors and then simulates the behaviour of security prices in a market composed of investors following these three styles. Evidence is found to suggest that compositions of investment styles that are fairly typical of the mix of investors in current-day markets will lead to anomalous price behaviour similar to that found by other writers: an underreaction to new information which often gives rise to a subsequent overreaction.

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  • Ron Bird & Xue-Zhong He & Satish Thosar & Paul Woolley, 2005. "The case for market inefficiency: Investment style and market pricing," Published Paper Series 2005-5, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    • Handle: RePEc:uts:ppaper:2005-5
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    File URL: https://link.springer.com/article/10.1057/palgrave.jam.2240154
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    Cited by:

    1. Ron Bird & Krishna Reddy & Danny Yeung, 2014. "The relationship between uncertainty and the market reaction to information: Is it influenced by stock-specific characteristics?," International Journal of Behavioural Accounting and Finance, Inderscience Enterprises Ltd, vol. 4(2), pages 113-132.
    2. Ron Bird & Lorenzo Casavecchia & Paolo Pellizzari & Paul Woolley, 2011. "The impact on the pricing process of costly active management and performance chasing clients," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 6(1), pages 61-82, May.
    3. Bird, R. & Menzies, G. & Dixon, P. & Rimmer, M., 2011. "The economic costs of US stock mispricing," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 552-567, July.
    4. Ron Bird & Xiaojun Gao & Danny Yeung, 2017. "Time-series and cross-sectional momentum strategies under alternative implementation strategies," Australian Journal of Management, Australian School of Business, vol. 42(2), pages 230-251, May.

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