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A Broad-Spectrum Computational Approach for Market Efficiency

Author

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  • Philippe Mathieu

    (LIFL - Laboratoire d'Informatique Fondamentale de Lille - Université de Lille, Sciences et Technologies - Inria - Institut National de Recherche en Informatique et en Automatique - Université de Lille, Sciences Humaines et Sociales - CNRS - Centre National de la Recherche Scientifique, SMAC - Systèmes Multi-Agents et Comportements - CRIStAL - Centre de Recherche en Informatique, Signal et Automatique de Lille - UMR 9189 - Centrale Lille - Université de Lille - CNRS - Centre National de la Recherche Scientifique)

  • Olivier Brandouy

    (LEM - Lille - Economie et Management - Université de Lille, Sciences et Technologies - CNRS - Centre National de la Recherche Scientifique)

Abstract
The Efficient Market Hypothesis (EMH) is one of the most investigated questions in Finance. Nevertheless, it is still a puzzle, despite the enormous amount of research it has provoked. For instance, it is still discussed that market cannot be outperformed in the long run (Detry and Gregoire, 2001), persistent market anomalies cannot be easily explained in this theoretical framework (Shiller, 2003) and some talented hedge-fund managers keep earning excess risk-adjusted rates of returns regularly. We concentrate in this paper on the weak form of efficiency(Fama, 1970). We focus on the efficacity of simple technical trading rules, following a large research stream presented in Park and Irwin (2004). Nevertheless, we depart from previous works in many ways : we first have a large population of technical investment rules (more than 260.000) exploiting real-world data to manage a financial portfolio. Very few researches have used such a large amount of calculus to examine the EMH. Our experimental design allows for strategy selection based on past absolute performance. We take into account the data-snooping risk, which is an unavoidable problem in such broad-spectrum researches, using a rigorous Bootstrap Reality Check procedure. While market inefficiencies, after including transaction costs, cannot clearly be successfully exploited, our experiments present troubling outcomes inviting close re-consideration of the weak-form EMH.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Philippe Mathieu & Olivier Brandouy, 2006. "A Broad-Spectrum Computational Approach for Market Efficiency," Post-Print hal-00731962, HAL.
  • Handle: RePEc:hal:journl:hal-00731962
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    References listed on IDEAS

    as
    1. Park, Cheol-Ho & Irwin, Scott H., 2004. "The Profitability of Technical Analysis: A Review," AgMAS Project Research Reports 37487, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    2. Robert J. Shiller, 2003. "From Efficient Markets Theory to Behavioral Finance," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 83-104, Winter.
    3. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    4. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    5. Jensen, Michael C & Bennington, George A, 1970. "Random Walks and Technical Theories: Some Additional Evidence," Journal of Finance, American Finance Association, vol. 25(2), pages 469-482, May.
    6. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    7. repec:pri:cepsud:91malkiel is not listed on IDEAS
    8. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    9. Halbert White, 2000. "A Reality Check for Data Snooping," Econometrica, Econometric Society, vol. 68(5), pages 1097-1126, September.
    10. Brock, William & Lakonishok, Josef & LeBaron, Blake, 1992. "Simple Technical Trading Rules and the Stochastic Properties of Stock Returns," Journal of Finance, American Finance Association, vol. 47(5), pages 1731-1764, December.
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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