The Efficient Market Hypothesis: Empirical Evidence

Topics: Stock market, Stock market index / Pages: 43 (10517 words) / Published: Apr 13th, 2013
International Journal of Statistics and Probability; Vol. 1, No. 2; 2012 ISSN 1927-7032 E-ISSN 1927-7040 Published by Canadian Center of Science and Education

The Efficient Market Hypothesis: Empirical Evidence
Martin Sewell1
1

Faculty of Economics, University of Cambridge, Cambridge, United Kingdom

Correspondence: Martin Sewell, Faculty of Economics, University of Cambridge, Sidgwick Avenue, Cambridge CB3 9DD, United Kingdom. Tel: 44-797-414-5461. E-mail: mvs25@cam.ac.uk Received: June 6, 2012 Accepted: August 3, 2012 Online Published: October 17, 2012

doi:10.5539/ijsp.v1n2p164 Abstract

URL: http://dx.doi.org/10.5539/ijsp.v1n2p164

The efficient market hypothesis (EMH) has been the central proposition of finance since the early 1970s and is one of the most well-studied hypotheses in all the social sciences, yet, surprisingly, there is still no consensus, even among financial economists, as to whether the EMH holds. Five statistical analyses are conducted in an attempt to explicate such apparently contrary convictions. An analysis of daily, weekly, monthly and annual Dow Jones Industrial Average log returns found that first-order autocorrelation is small but positive for all time periods, with the autocorrelations for daily and weekly returns closest to zero, and thus an efficient market. A standard runs test showed that the hypothesis of independence is strongly rejected for daily returns, but accepted for weekly, monthly and annual returns, whilst the results of a more sophisticated runs test showed that daily, weekly and decreasing returns are the least consistent with an efficient market. Rescaled range analysis was conducted on the same data sets, and there was no significant evidence for the existence of long memory in the returns, a result consistent with market efficiency. Finally, from an analysis of investment newsletters it may be concluded that technical analysis— as applied by practitioners—fails to outperform the market. I reconcile the fact that

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