ACCT 2102 Lecture Notes - Lecture 4: Efficient-Market Hypothesis, Aqr Capital, London Business School
Document Summary
Theory says that the past performance of stock prices is no guide to the future. It is natural to assume that the law of gravity should also apply in financial markets. But in 2010 european investors would have prospered by following a different rule. Anyone who bought the best-performing stocks of the previous year would have enjoyed returns more than 12 percentage points higher than someone who bought 2009"s worst performers. Since the 1980s academic studies have repeatedly shown that, on average, shares that have performed well in the recent past continue to do so for some time. Longer-term studies have confirmed that this momentum effect has been observable for much of the past century. Nor is the phenomenon confined to the stockmarket. Commodity prices and currencies are remarkably persistent, rising or falling for long periods. The momentum effect drives a juggernaut through one of the tenets of finance theory, the efficient-market hypothesis.
