The efficient market hypothesis has been considered one of the most controversial arguments in finance, with the academia divided between who claims the impossibility of beating the market and who believes that it is possible to gain over the average profits. If the hypothesis holds, it means, as suggested by Burton Malkiel, that a blindfolded monkey selecting stocks by throwing darts at a newspaper’s financial pages could perform as well as a financial analyst, or even better. In this paper we used a novel approach, based on confidence intervals for proportions, to assess the degree of inefficiency in the S&P 500 Index concluding that for several stocks the weak form of efficiency should be ruled out: we estimated the proportion of inefficient stocks in the index to be between 12.13% and 27.87%. This supports other studies proving that the efficiency hypothesis could not be considered the norm and, consequently, a financial analyst could be a better investor than a blindfolded monkey.

Blindfolded monkeys or financial analysts: Who is worth your money? New evidence on informational inefficiencies in the U.S. stock market

Giuseppe Pernagallo
Writing – Original Draft Preparation
;
Benedetto Torrisi
Writing – Original Draft Preparation
2020

Abstract

The efficient market hypothesis has been considered one of the most controversial arguments in finance, with the academia divided between who claims the impossibility of beating the market and who believes that it is possible to gain over the average profits. If the hypothesis holds, it means, as suggested by Burton Malkiel, that a blindfolded monkey selecting stocks by throwing darts at a newspaper’s financial pages could perform as well as a financial analyst, or even better. In this paper we used a novel approach, based on confidence intervals for proportions, to assess the degree of inefficiency in the S&P 500 Index concluding that for several stocks the weak form of efficiency should be ruled out: we estimated the proportion of inefficient stocks in the index to be between 12.13% and 27.87%. This supports other studies proving that the efficiency hypothesis could not be considered the norm and, consequently, a financial analyst could be a better investor than a blindfolded monkey.
Efficient market hypothesis; Informational efficiency; Memory Random walk; Runs test; Variance ratio
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.11769/371821
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