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9

This the "Joint Hypothesis Problem". Basically, any test for abnormal returns is also implicitly a test of the model you use to define "abnormal". If you see a significant and positive $\alpha$, that could either mean that you actually are generating excess risk-adjusted returns, or it could mean that your risk model is incomplete. This is basically what ...


8

If one finds an anomaly relative to some asset pricing model, there are three possibilities: The anomaly you "found" actually isn't there: you're overfitting the data, found a spurious result. The efficient market hypothesis is wrong. The asset pricing model you're using is wrong. Any test of market efficiency is a joint test of market efficiency and an ...


5

The weak EMH states that it is impossible to earn an excess return given publicly known information such as past prices. Clearly, different securities have different expected returns. For example: the bond and the stock of one company or a security that generates twice the return of another one. This difference in expected return is explained by a ...


4

The Efficient Market Hypothesis (EMH) states that you cannot beat the market on a risk-adjusted basis by looking at past prices. You can certainly earn higher returns than the market if you take on more risk (by leveraging, for example). Modern Portfolio Theory allows you to construct portfolios that are efficient. According to this theory, you still cannot ...


3

You might find this paper interesting: "Does Finance Benefit Society?" It's a very complicated question and in my opinion the above paper provides a nuanced answer.


2

EMH says that one can not earn excess return using some information. This is known as joint-hypothesis problem: to test for market efficiency one have to determine first what is "normal" market return, i.e. what type of information is normally priced by the market. Usually to test for EMH they use CAPM or 3-factor Fama-French model (which is a kind of CAPM-...


2

I have a paper that argues that the distribution of returns cannot have a mean. I argue that prices are data and that returns are not data. Rather, returns are transformations of data. Therefore, it is the statistical distribution of prices that must determine the distribution of returns. Since returns are $$\frac{p_{t+1}}{p_t}-1,$$ it follows that ...


2

Existence of arbitrage opportunities does not lead to market as inefficient. Samuelson has defined relationship between existence of arbitrage opportunities and market efficiency. He said: if market adjust quickly to arbitrage opportunities to return back to normal without cost of any other investor and through market mechanism then market can be ...


1

EMH: An asset always trades at its fair value. That is, all information is continuously being priced in. RWH: The asset price is not predictable and follows a random walk. So RWH is a hypothesis which is consistent with EMH. If every piece of information is being priced in continuously, and you cannot predict what information will become available, then ...


1

Read paper written by Malkiel, "The Efficient Market Hypothesis and Its Critics". It is wonderful paper on EMH. http://eml.berkeley.edu/~craine/EconH195/Fall_14/webpage/Malkiel_Efficient%20Mkts.pdf It will help you to gain conceptual clarity in EMH.


1

Market is efficient when all available public information gets priced-in relatively fast by market participants. This yields the fair price. Efficiency depends on the speed of the information dissemination. Equilibrium is a balance between supply and demand, which can be skewed by short term liquidity issues. So market can be efficient and not in equilibrium ...


1

MPT uses expected values for its parameters. How these expected (future) parameters are estimated, is another question. Usually one takes historic averages when its the only information available, but one could for example also use analysts forecasts or other advanced estimation methods.


1

The fundamental theorem of mathematical finance states that under the assumption of no arbitrage (which is by the way an idealization and not possible in the real world), a probability measure exists under which all "relative asset prices" are martingales. What is meant by "relative asset prices" is the asset prices divided by the price of one particular ...


1

As in the vonjd's answer martingale property makes some sense only if considered with the risk premium and risk-free rate ("stochastic discount factor" they say). Discounted stock price process is assumed to be a martingale in many studies. The root of H02's "evil" is Fama's Efficient Market Hypothesis Survey. It is the most clear and comprehensive survey ...


1

In the equilibrium models you can assume that there exists so called Alpha, i.e. an opportunity that can be exploited. Most of the buy side models (i.e. asset allocation, portfolio construction) are based on this idea. As a theoretical model, you can consider CAPM with heterogeneous beliefs: Hedge funds claim to generate the “Alpha”, i.e., excess ...


1

There are many good answers already, but I give this one just to provide some additional intuition: The simplest random walk is tossing a coin several times: heads means one up, tails means one down. Because of the symmetry of this process the sum of those tosses adds up to zero, on average: it is a martingale! Intuitively a martingale means that, on ...


1

I probably will answer your question in a simple fashion before getting to a much mathematical term because I may suspect you are not familiar with stochastic terms/jargons yet. A variable could be called a martingale if the expectation of the variable at $t+1$ equals to the expectations of the variable at $t$ (basically we joke that if we don't learn ...


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