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Questions tagged [market-efficiency]

An efficient market is one where the market price is an unbiased estimate of the true value of the investment.

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2 answers
128 views

Latency (market updates) and link to market efficiency

In the book by Lehalle and laruelle - "market microstructure in practice" - "The trading activity of HFT updates limit orderbooks at a higher rate than the round trip for any non-...
29 votes
11 answers
15k views

Why are there no papers about stock prediction with machine learning in leading financial journals?

I'm writing my master's thesis about stock price prediction using machine learning methods. During my literature review, I noticed that a lot of research produced on this topic is of poor quality, ...
4 votes
3 answers
2k views

Does AI-based trading assume efficient market hypothesis?

When we use AI (machine learning/deep learning) in trading does that assume efficient market hypothesis? I know quantitative finance assumes price moves are random (efficient market hypothesis). Does ...
0 votes
0 answers
28 views

Market Fragmentation

Consider a scenario where a security can be exchanged on two exchanges A and B. A trader who has access to A and B with same execution probabilities submit an order and split it between A and B ...
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1 answer
142 views

Can MACD with a broad range of parameter combinations beat Buy and Hold under the Efficient Market Hypothesis?

I conducted a study with Moving Average Convergence Divergence (MACD)s in the range of ...
0 votes
0 answers
19 views

Need help analysing results of an autocorrelations test result

I am a analysing weak-form efficiency of the NIFTY 100 Index (01-01-2014 to 31-01-2024). The first four lags have high p-value, hence they show randomness. however, all the rest of the lags do show ...
11 votes
1 answer
3k views

What are the main market efficiency measures in the stock market?

I'm going to test for the effect of the change in market efficiency on the stock market portfolio, and, I want to know what are the main measures known in the academic literature in order to compare ...
1 vote
2 answers
202 views

Estimate of realized spread

Given a dataset with second level information about open, high, low, close, volume and vwap of a stock - how can one estimate the realized spread - a simple estimate could be (high - low)- but can one ...
4 votes
1 answer
263 views

What color financial time series are there?

There is a folklore white noise hypothesis related to (and equivalent to some forms of) the efficient market hypothesis in finance -see references below. But are there some asset pairs whose return ...
1 vote
0 answers
196 views

Relation between CAPM and efficient market hypothesis [closed]

I am coming from a machine learning/time series forecasting background and are currently studying Asset Pricing. I have a good understanding of what Markowitz Mean-Variance Optimization (MVO) does, ...
6 votes
4 answers
619 views

Why do anomalies disappear after they get detected?

In financial markets, anomalies refer to situations when a security or group of securities performs contrary to the notion of efficient markets, where security prices are said to reflect all available ...
2 votes
1 answer
160 views

Joint tests of market efficiency - Is it possible to test market efficiency with either one?

Tests of market efficiency are the joint tests of (1)the market is efficient and (2) expected return model. Please help me (a) explain this and (b) is it possible to test market efficiency with ...
1 vote
0 answers
91 views

Proof that points to an alternative explanation for the absence of autocorrelation in price movement

The absence of linear autocorrelation in asset price movement has been empirically observed countless times. It is usually accompanied by an explanation that goes something like this: If there was ...
0 votes
0 answers
88 views

Good performance of naive forecasting in efficient markets

I am doing spot price forecasting for a market, and so far, the naive forecasting model, which forecasts with the last observed prices, is the best forecasting model. I know that it might be because ...
0 votes
2 answers
154 views

Does the random walk theory assume a simple symmetric random walk?

Does the random walk theory assume a simple symmetric random walk? In other words: does the random walk theory assume that the price rises as often as it falls? I've been looking for an answer for a ...
1 vote
0 answers
128 views

Why is it that returns at the efficient market hypothesis has to be risk-adjusted?

Let us assume the following situation: Average market return: $R_M = 8\%$ Risk-free rate: $R_F = 2\%$ Actual return of share A after one year: $R_{A} = 15\%$ Actual return of share B after one year: $...
0 votes
5 answers
441 views

What mechanisms does the market use to brining an asset back to the market line, as defined by CAPM?

The Capital Asset Pricing Model (CAPM) model states that, on efficient market, expected return of an asset should be given by a linear function of its volatility (as measure by standard deviation of ...
5 votes
1 answer
336 views

Fama: Efficient Capital Markets: A Review of Theory and Empirical Work - are martingales incorrect?

In his paper, Eugene Fama gives the definition of a "fair game" as given below. I disagree. AFAIK, a martingale has the following property: $E[X_{t+\tau} | X_t] = X_t$. What am I missing? ...
3 votes
3 answers
776 views

Why exposure to the profitability factor increases investment premium?

I'm a DIY investor that attempts to put together his market portfolio, tilted to increase factor exposure. Currently, I'm trying to do it based on the French-Fama 5-factor model. This model contains ...
0 votes
2 answers
121 views

Is it possible to build a computer model to simulate a market to prove whether efficient theory is true or not?

I know this may sound stupid. But I had this idea and wanted to try it out for a college project. Has this been done before? If and what's wrong with this idea?
1 vote
1 answer
91 views

Release of information and Efficient Market Hypothesis

My understanding of markets is very limited, and I mostly have a theoretical understanding of issues of these sorts. Under the Efficient Market Hypothesis, we assume that the stock market reflects a ...
1 vote
2 answers
484 views

NPV and efficient market hypothesis

If I have an opportunity of investment, let's call it investment (A), that costs $I$ in year 0 and gives me $CF_1$ in year 1, I will accept it only if $NPV>0$ $NPV = -I + \dfrac{CF_1}{1+k} > 0$ ...
1 vote
0 answers
459 views

Are BARRA's Multiple-Factor Risk models rational asset pricing models?

Barra's Multiple-Factor Models for risk (e.g. USE3, USE4, CNE5) are much like those models used in empirical asset pricing studies such as CAPM, Fama-French three-factor model and others. I'm not ...
2 votes
1 answer
341 views

Gibbons, Ross, Shanken Test derivation by MLE

I Am trying to derive the expression for the GRS test of the CAPM. I am following the book: The Econometrics Of Financial Markets by Campbell, Lo, McKinley (1997). Define $Z_t$ as an $N×1$ vector of ...
9 votes
6 answers
2k views

Kurtosis in asset logarithmic returns

Assets such as stocks usually display kurtosis in their logarithmic returns. However, their logarithmic returns in a time interval $n$ are the sum of smaller logarithmic returns in $1/n$ time ...
1 vote
2 answers
826 views

if the​ risk-free interest rate​ increases, and nothing else changes, is the market portfolio still efficient?

I think the response is no but I don't know why If so, Stocks with betas greater than one will be buying opportunities and stocks with betas less than one will be selling opportunities because I can ...
4 votes
1 answer
274 views

Why is change in risk premium not a violation of the Efficient Markets Hypothesis?

A passage in my textbook is confusing me. It states that various market indicators (e.g. yield spreads between high/low grade bonds, earnings yields) lead to predictability in the security's risk ...
2 votes
0 answers
48 views

Cointegration between prices and dividends. How do I get the following expression?

Actually, I have two questions: 1. Let us assume that expected returns are constant. Then, we have the following expression for how the prices should be determined, provided that the operators are ...
4 votes
2 answers
155 views

How to Mathematically Prove Markets are Price-Discovering?

We all know that the Efficient Market Hypothesis is true if you're willing to make enough simplifying assumptions about the market participants. But where can I find a mathematical proof of this in ...
0 votes
2 answers
116 views

How does the efficient market hypothesis fit with the rapid changes in prices?

The price of IBM changes from second to second, but there's no way that actual news about IBM is coming out that fast. The information available about IBM changes a lot more slowly than its share ...
1 vote
2 answers
338 views

Volatility clustering and Behavioral Finance, possible explanation

Currently studying about time series modelling of financial data and faced the known GARCH$(p,q)$ model for modelling volatility. We observe that big changes are followed by large changes and vice ...
5 votes
1 answer
152 views

"Dusty Corners of the Market" and Limits-to-Arbitrage

In his 21 November 2014 blog post, Dusty Corners of the Market, John Cochrane seems to imply that certain areas of the market tend to be more resilient to the forces of arbitrage and efficiency. The ...
0 votes
2 answers
136 views

Who benefits from more fair market?

An year ago, I asked the hedge fund owner I worked for: "What is the main benefit for the people, the society and the market from what the hedge funds do?". He simply answered that "They make the ...
2 votes
3 answers
313 views

If markets are efficient, why are most returns systematically high?

Suppose markets are perfectly efficient and asset prices reflect all available information. Under this assumption one expects current prices to be non-biased estimators of future prices. It seems to ...
1 vote
2 answers
942 views

Why does the Weak Form of Market Efficiency and Markov Property hold?

This question is to do with a paragraph in Hull (Options and other Derivatives) He explains that Stock Prices usually follow a Markov Property, where the current price of the stock contains all the ...
3 votes
2 answers
332 views

Do underlying assets have a no-arbitrage price?

Can it be shown that the Fundamental Theorem on Asset Pricing (FTAP) applies to underlying assets -- namely bonds, equities, and commodities? FTAP says that assets have no-arbitrage prices equal to ...
6 votes
0 answers
155 views

Mathematical Representation of Adaptive Markets Hypothesis

It has been about 13 years since Andrew Lo published The Adaptive Markets Hypothesis. It provides valid criticism to Efficient Markets Hypothesis and brings lots of innovation over it. Unfortunately, ...
17 votes
2 answers
705 views

Does the rise in passive investing make the markets less efficient?

The general idea of efficiency in financial markets is that information is being processed almost instantaneously because active investors arbitrage away any arising price discrepancies. On the other ...
5 votes
4 answers
1k views

Does the existence of anomalies disprove the efficient markets hypotheses?

Is the existence of anomalies to the EMH sufficient to disprove the EMH, or do we need a persistent anomaly which the financial markets cannot correct to disprove the EMH? This question is for the ...
1 vote
2 answers
282 views

Is there any good academic references for Forex inefficiency? [closed]

I am PhD in computer science, and I am pretty much clueless where can I look for good journals or conferences for Forex that talked about its inefficiency. Is there any good journals, conferences that ...
1 vote
2 answers
312 views

Does cointegration contradict the market efficiency?

It is generally assumed that market prices follow random walks, implying market efficiency. However, one could find that some combinations of the "random walks" are cointegrated. Does this ...
8 votes
2 answers
4k views

Do efficient market hypothesis and random walk theory convey the same concept?

According to investopedia efficent market hypothesis is The efficient market hypothesis (EMH) is an investment theory that states it is impossible to "beat the market" because stock market ...
1 vote
0 answers
119 views

Problem with overlapping data when testing futures market efficiency

In my case non-overlapping data would represent the scenario where futures prices (3 months) do not correspond to the futures spot prices in terms of delivery date. For example, futures settlement ...