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an interesting case of winners that disagree strongly. see Market Efficiency, Long-Term Returns, and Behavioral Finance by Fama at

Abstract: market efficiency survives the challenge from the literature on long-term return anomalies.

Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent over-reaction to information is about as common as under-reaction. And post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal.

Consistent with the market efficiency prediction that apparent anomalies can also be due to methodology, the anomalies are sensitive to the techniques used to measure them, and many disappear with reasonable changes in technique.

I have always been amazed by the efficient markets hypothesis. Is it an explanation or a description of a state of affairs with no explanation? I can understand what is being *described* by finding that asset prices are efficient insofar as they reflect all public information. How did they get that way? EMH Answer: If they weren't, there would be arbitrage opportunities and that is inconsistent with "rationality" as defined to exclude arbitrage opportunities. I feel I am in a bedlam of sorts.

Fama is somewhat misleading in the linked paper. Anomalies do happen and can persist for extended periods of time. However, he is right in that generally once they are publicized they disappear, with some odd exceptions, some of which he verified with French such as size of firm and book value effects.

Where EMH is most useful, even in a world where anomalies and bubbles exist, is in arguing that average investors have no special ability to know more about the market about such things (with this holding also for the vast majority of financial advisers/investment firms/etc.), so that for most people they should assume a random walk and just buy and hold reasonably well diversified index funds for their retirement savings in financial assets. For this alone, he deserves his trip to Stockholm, quite aside from some silly remarks he has said at times such as his claim that there are no such things as bubbles, which he made in a New Yorker interview back in Jan. 2010.

@ Barkley. Most restatements of EMH does nothing to show how the hypothesis explains the phenomenon of efficient asset pricing. In fact, they makes EMH look even weirder. The concept of "public availability" is troublesome on its own terms. This is because in the retelling not all of the public grasps the meaning or significance of what is available. So in what sense it is publicly available? If you say that some people are potentially more alert or smarter about the significance of some information then we are back to an pretty innocuous view. Perhaps we now know that it is really, really hard to have the extra insight.

My general point is that when people try to save the hypothesis they wind up saying things that were previously accepted. As to the strict version, even if it were supported by the data it would leave the phenomenon it discovered quite unexplained -- except in the technical sense of providing the mathematical model of pricing. A mystery upon a mystery.

Mario Rizzo

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