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