The Efficient Market Hypothesis and Its Critics
Burton G. Malkiel (2003)
Presented by:Septian Bayu K. 0806479080
Outline
• Introduction• A Nonrandom Walk Down Wall Street• Predictable Pattern Based on Valuation
Parameters• Cross-Sectional Predictable Patterns Based on
Firm Characteristics and Valuation Parameters• Seeming Irrefutable Cases of Inefficiency• The performance of Professional Investors• Conclusion
Introduction
• Accepting EMH• EMH and random walk• Intellectual dominance• Paper examination
A Nonrandom Walk Down Wall Street
• Short term momentum, including underreaction to new information
• Long run return reversal• Seasonal and day-of-the-week patterns
Predictable Patterns Based on Valuation Parameters (1)
• Predicting future returns from initial dividends yields (exhibit 1.1)
• Predicting market returns from initial price-earnings multiples (exhibit 1.2)
• Other predictable time series patterns
Predictable Patterns Based on Valuation Parameters (2)
• Exhibit 1.1
Predictable Patterns Based on Valuation Parameters (3)
• Exhibit 1.2
Cross-Sectional Predictable Patterns Based on Firm Characteristics and Valuation Parameters (1)
• The size effect (exhibit 2)• Value stocks (exhibit 3)• The equity risk premium puzzle• Summarizing the “anomalies” and predictable
patterns
Cross-Sectional Predictable Patterns Based on Firm Characteristics and Valuation Parameters (2)
• Exhibit 2
Cross-Sectional Predictable Patterns Based on Firm Characteristics and Valuation Parameters (3)
• Exhibit 3
Seemingly Irrefutable Cases of Inefficiency
• The market crash of October 1987• The internet bubble of the late 1990s• Other illustrations of irrational pricing
The Performance of Professional Investors (1)
• Exhibit 4
The Performance of Professional Investors (2)
• Exhibit 5
The Performance of Professional Investors (3)
• Exhibit 6
The Performance of Professional Investors (4)
• Exhibit 7
The Performance of Professional Investors (5)
• Exhibit 8
The Performance of Professional Investors (6)
• Exhibit 9
Conclusion
• Market cannot be perfectly efficient• Whatever patterns or irrationalities, they are
unlikely to persist would not provide extraordinary returns for investor