EMH ROUNDTABLE
What now for
effi cient markets?
In a round-table discussion, Alan Brown, FSIP, Roger Ibbotson, and
William J Bernstein address the future of the effi cient market hypothesis
Is the Effi cient Market Hypothesis effi cient markets. We wouldn’t be able this comes from risk. But I also believe
(EMH) effectively dead or was there a to recognise a departure from effi cient that there is a behavioral component as
misunderstanding by investors?
markets without fi rst understanding the well emanating from investors’
concept of effi cient markets. emotional preferences for growth
BROWN – EMH and the capital asset stocks. To the extent that the latter
pricing model (CAPM) are not dead BERNSTEIN – I don’t think it’s dead, explanation is true, the value premium
but everyone should realise that they and I think that the misunderstanding results from market ineffi ciency.
are an abstraction of reality. Few was only partial. Momentum presents an even bigger
practitioners believe that markets are Clearly, at the micro level, the challenge to the EMH, suggesting that
perfectly effi cient. Th ree standard markets are brutally effi cient. In fact, although information begins to be
deviation events and asset-price bubbles at the level of mutual funds and incorporated nearly instantaneously
occur with far greater regularity than pension plans, markets are almost into prices, the process takes some time
would be consistent with a random perfectly effi cient. Th at is to say that to complete.
walk. Th at said, it doesn’t mean that over seven decades of data, using
beating the market is easy. It isn’t! increasingly sophisticated methods,
show no real evidence of any
“At the micro level,
IBBOTSON – I don’t believe the effi cient connection between ex post and ex
market hypothesis is dead. It’s a basic ante performance. Put yet another way,
the markets are
conceptual understanding of how almost all outperformance is due to
fi nancial markets work. We are fi nding luck, not skill. Perhaps there is some
more ineffi ciencies the more we look, evidence of ineffi ciency/skill in hedge
brutally effi cient”
but the basis of how markets work is funds and endowments, but even here
explained within the effi cient market the data are weak and, as pointed out
BERNSTEIN
hypothesis. And even though we are by Cliff Asness and others, their
fi nding more ineffi ciencies, it is still evaluation is problematic because of
diffi cult for investors to outperform the pricing problems.
Is EMH a simplifi cation of fi nancial
market. At the macro level, the markets can
market behaviour and, if so, should
Investing is a zero-sum game, so that be ludicrously ineffi cient, hors
investors look beyond such
in aggregate there is zero alpha. But d’combat of Keynesian animal spirits.
simplifi cations?
that’s not really the idea behind effi cient How else to explain the madness of the
markets. Th e zero-sum game is a late 1990s or the more recent pricing BROWN – CAPM is a simple one-factor
mathematical identity. Effi cient markets of Treasury securities? model. We have seen useful attempts at
is a stronger idea that no-one can And even at the micro level, there are its extension with, for example, the
achieve alpha except through luck. We certainly challenges to the EMH. For work of Eugene Fama and Ken French
are fi nding that certain areas of fi nance, example, the source of the value introducing value and size factors. We
such as the hedge fund industry, can get premium is murky. As has been all too are also now seeing interesting work
alpha. Th is is violating the idea of vividly demonstrated recently some of coming in from behavioural fi nance.
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 17
17-1917-19 roundtable.indd 17roundtable.indd 17 1/6/091/6/09 12:36:0112:36:01Professional Investor Summer 09.19 19 4/6/09 15:40:50
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