TITLE

On the Impossibility of Weak-Form Efficient Markets

AUTHOR(S)
Slezak, Steve L.
PUB. DATE
September 2003
SOURCE
Journal of Financial & Quantitative Analysis;Sep2003, Vol. 38 Issue 3, p523
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
Recent theoretical models show that irrational expectations can generate return predictability consistent with apparent violations of weak-form market efficiency documented in the empirical literature. These behavioral models constrain rational investors' ability to exploit inter-temporal predictability by assuming that rational agents face high transactions costs, are myopic, or are non-existent. This paper presents a model in which there are two types of irrational expectations, one that causes momentum and another that creates reversals. I investigate whether these types of predictability will persist in the presence of fully rational agents who face no transactions costs, are long lived, and trade dynamically to optimally exploit any predictability due to irrational mispricings. I show that weak-form market efficiency will be violated under two very weak conditions: rational investors are risk averse and the fundamental value of the asset is risky. The paper also investigates the accumulation of wealth by trader type and shows that irrational agents will survive under a large set of parameters.
ACCESSION #
11018741

 

Share

Read the Article

Courtesy of THE LIBRARY OF VIRGINIA

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics