Stock market efficiency: an autopsy?
This article assesses the current state of the efficient market hypothesis, which was the conventional wisdom among academic economists in the 1970s and most of the 1980s. It concludes that empirical evidence provides an overwhelming case against the efficient market hypothesis. The evidence exists in the form of a number of well-established anomalies--the small firm effect, the closed-end fund puzzle, the Value Line enigma, the loser’s blessing and winner’s curse, and the January and weekend effects. ; These anomalies can be explained by resorting to a model of "noise trading," in which markets are segmented with the "smart money" enforcing a high degree of efficiency in the pricing of stocks of large firms while less informed traders dominate the market for small firms. This model can generate cycles in stock prices similar to those observed in the real world. The evidence suggests that in an inefficient market, policies designed to mitigate price changes might be appropriate.
Volume (Year): (1991)
Issue (Month): Mar ()
|Contact details of provider:|| Postal: |
Web page: http://www.bos.frb.org/
More information through EDIRC
|Order Information:|| Email: |
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Robert J. Shiller, 1980.
"Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?,"
NBER Working Papers
0456, National Bureau of Economic Research, Inc.
- Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
- Kleidon, Allan W, 1986. "Variance Bounds Tests and Stock Price Valuation Models," Journal of Political Economy, University of Chicago Press, vol. 94(5), pages 953-1001, October.
- De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
- Malkiel, Burton G, 1977. "The Valuation of Closed-End Investment-Company Shares," Journal of Finance, American Finance Association, vol. 32(3), pages 847-59, June.
- LeRoy, Stephen F & Porter, Richard D, 1981. "The Present-Value Relation: Tests Based on Implied Variance Bounds," Econometrica, Econometric Society, vol. 49(3), pages 555-74, May.
- De Long, J. Bradford & Shleifer, Andrei & Summers, Lawrence H. & Waldmann, Robert J., 1990.
"Noise Trader Risk in Financial Markets,"
3725552, Harvard University Department of Economics.
- Schwert, G William, 1989.
" Why Does Stock Market Volatility Change over Time?,"
Journal of Finance,
American Finance Association, vol. 44(5), pages 1115-53, December.
- G. William Schwert, 1988. "Why Does Stock Market Volatility Change Over Time?," NBER Working Papers 2798, National Bureau of Economic Research, Inc.
- Marsh, Terry A. & Merton, Robert C., 1984.
"Dividend variability and variance bounds tests for the rationality of stock market prices,"
1584-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Marsh, Terry A & Merton, Robert C, 1986. "Dividend Variability and Variance Bounds Tests for the Rationality ofStock Market Prices," American Economic Review, American Economic Association, vol. 76(3), pages 483-98, June.
- Keim, Donald B., 1983. "Size-related anomalies and stock return seasonality : Further empirical evidence," Journal of Financial Economics, Elsevier, vol. 12(1), pages 13-32, June.
- Lee, Charles M C & Shleifer, Andrei & Thaler, Richard H, 1991.
" Investor Sentiment and the Closed-End Fund Puzzle,"
Journal of Finance,
American Finance Association, vol. 46(1), pages 75-109, March.
- William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
- Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
- Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 19-33, Spring.
- Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
- Poterba, James M. & Summers, Lawrence H., 1988.
"Mean reversion in stock prices : Evidence and Implications,"
Journal of Financial Economics,
Elsevier, vol. 22(1), pages 27-59, October.
- James M. Poterba & Lawrence H. Summers, 1987. "Mean Reversion in Stock Prices: Evidence and Implications," NBER Working Papers 2343, National Bureau of Economic Research, Inc.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
- Peter Fortune, 1989. "An assessment of financial market volatility: bills, bonds, and stocks," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 13-28.
When requesting a correction, please mention this item's handle: RePEc:fip:fedbne:y:1991:i:mar:p:17-40. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Catherine Spozio)
If references are entirely missing, you can add them using this form.