1. EfficientMarketHypothesis Bhatia, Kim, Lee, Manghi, Richards

2. Are Markets Efficient???

3. Issues in Examining the Results • Magnitude Issue – value add or marginal contribution? • Selection Bias Issue – no dogs allowed • Lucky Event Issue – coin flippers and Kramer • Kramer Meltdown

4. Three Different Forms • Weak • Semi-strong • Strong

5. Weak Form Tests • Serial Correlation • tendency for stock returns to be related to past returns • Positive – positive follows positive • Negative – negative follow positive “reversion” • Momentum • portfolios of best-performing stocks over short time horizon (3-12 months) • Returns over Long Horizons • longer periods even out “fads” and capture mispricing

6. Predictors of Broad Market Returns • Fama and French • Aggregate returns are higher with higher dividend ratios • Campbell and Shiller • Earnings yield can predict market returns • Keim and Stambaugh • Bond spreads can predict market returns

7. Semi-Strong Tests • Market Anomalies • P/E Effect • Small Firm Effect (January Effect) • Neglected Firm • Book-to-Market Effects • Post-Earnings Announcement Drift

8. Returns in Excess of Risk-Free Rate and in excess of the Security Market Line for 10 Size-Based Portfolios, 1926 – 2005

9. Semi-Strong Tests • Market Anomalies • P/E Effect • Small Firm Effect (January Effect) • Neglected Firm • Book-to-Market Effects • Post-Earnings Announcement Drift

10. Average Monthly Returns as a Function of the Book-To Market Ratio, 1963 – 2004

11. Semi-Strong Tests • Market Anomalies • P/E Effect • Small Firm Effect (January Effect) • Neglected Firm • Book-to-Market Effects • Post-Earnings Announcement Drift

12. Cumulative Abnormal Returns in Response to Earnings Announcements

13. Strong-Form Tests • Inside Information • Superior profits trading in own firm’s stock • Securities and Exchange Commission (SEC) regulation and registration • Official Summary of Security Transactions and Holdings • Report within two business days • Insider Monitor.com

14. Interpreting the Evidence • Risk Premiums or Inefficiencies • Disagreement here • 3 Factor Model • Systematic error in analyst forecasts • Data Mining or Anomalies • Presidential Politics • market is a poor barometer of economic well-being • President's policies are only a small part of what drives the economy • nearly impossible to get the timing right to do this kind of comparison

15. Returns to Style Portfolio as a Predictor of GDP Growth

16. References • http://gregmankiw.blogspot.com/2008/10/republicans-democrats-and-stock-market.html • http://insider-monitor.com/