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Malkiel, B.G., 2003. The Efficient Market Hypothesis and Its Critics. Journal of Economic Perspectives. 17 (1). pp. 59 – 82.

1.1 In the abstract reprinted below, underline any key words or phrases which you do not understand:

Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behavioral elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable. This survey examines the attacks on the efficient market hypothesis and the relationship between predictability and efficiency. I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe (Malkiel, 2003).

1.2 Identifying topics: in the abstract, Malkiel refers to two main categories of challenge to the Efficient Market Hypothesis (EMH). What are they? Explain them briefly.

1.3 In your own words, what is the purpose of the paper? Could the writer be trying to disprove attacks on the EHM, i.e. argue, or to examine it in a more open-minded way?

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3.1 Survey the text and identify its overall structure: both main sections and subsections.
3.2  If you wanted to gain a quick overview of the main ideas of the first part of the text, where  might you look?
3.3  You have already identified that Malkiel is a supporter of the EMH but that he aims to consider the validity of challenges to the theory. Predict what structure his article may take (ie would he present only the alternative argument? his own view first, then the alternative? or would he present the alternative first then his own?).

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In this task, you will examine how this particular writer deals with arguments for and against the EMH.

4.1  Look at the section titled “Short-Term Momentum, Including Underreaction to New Information” (p. 61). Underline ideas in favour of the EMH, and put a dotted…..line under arguments against itfor the first paragraph only of this section.
4.2  In the first sentence of the first main paragraph of the section, how does the writer show that he is discussing research which supports the EMH?
4.3  Now look in the first three paragraphs of the section for other language which shows support for or challenges against the EMH.
4.4  How does the writer signpost their move from arguments for the EMH to those against it?  Look at the first three paragraphs of this section for examples.

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5.1  Read paragraph 3 of the same section more carefully and decide whether the evidence supporting short-term momentum arguments is presented by the writer as

Very strong ---- strong ---- medium ---- weak ---- very weak

5.2  Which words and phrases helped you to answer 5.1?
5.3  In paragraph 4, decide how strong the writer believes the evidence is for frequent patterns in the stock market.

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Go to p.76 “The Performance of Professional Investors”.

6.1  In your view, would you expect professional investors to outperform the market? Why, or why not?

6.2  Why do you think this aspect of market performance might be worth studying?

6.3  Now look at the text. Why did Malkiel examine professional investor performance?

6.4  What does he find about professional investor performance – do they beat the market?

6.5 Critical reading: what evidence is given for 6.4? Is it convincing?

6.6  Discuss what implications these findings have for the EMH. Be ready to explain your answer to the class.

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Imagine you had to write an essay which evaluated the EMH and alternative theories of market behaviour. Identify two articles referred to in the text which you could read for evidence in support of the EMH, and two against it. To save time, only look at p. 61 & 62.

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1.1 Spawn  counterrevolution conometrician

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1.1 intellectual

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Team 4 .  1.2  economists = people lay emphasis on mental and human activities of stock-price determination and econometricians = people focus on divinable stock dividends .

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Team 4 .  1.2  economists = people lay emphasis on mental and human activities of stock-price determination and econometricians = people focus on divinable stock dividends .

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1.2 stock-price determination
stock returns

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economists
econometricians

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economics
econometrician

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background - some data and research studies:1、3
definition:1、2、6
aim(s)：5
outline/structure:5
stance (opinion):7
counter-claim (counter-opinion)：4
[gap - insufficient data/research in the literature]

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background =1,3,
definition:1,2,6
aim(s):5 ,
outline:5,
stance(opinion):7
counter-claim (counter-opinion):4

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The author used metaphors in his book to show that even uninformed investors can earn profit from diversified portfolio.

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background - some data and research studies 1、4
definition 2
aim(s) 5
outline/structure 5、6
stance (opinion) 5、6、7
counter-claim (counter-opinion)  4
[gap - insufficient data/research in the literature]  3

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Paragraph 2

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Defination of efficient financial market+100 bill story=investors cannot earn above-average returns without accepting above-average risks
3 assumptions: make errors in valuation; participants are irrational; stock prices exhibit greater volatility=efficient market

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EMH does exist=Benjamin (1965), in short-term may be a voting mechanism, while in long-term is a weighing mechanism
stock market cannot be predict

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Now many economists think stock price is somewhat predictable, however, these predictable patterns will bring more risk.

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Para 1: Basics of EMH (Fama 1970) = prices quickly reflect all publicly available info so analysis  exceptional returns = imposs. Hypothesis generally accepted at that time.

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Para 1: Basics of EMH (Fama 1970) = prices quickly reflect all publicly available info so analysis  exceptional returns = imposs. Hypothesis generally accepted at that time.

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2.1 From the seminar on introductions and conclusions, what types of information do you expect the introduction of a journal article (not just this one) to contain?
Answer:
background -  recent research - some data
[gap in the literature - insufficient data/research or unsolved problem (controversy)]
aim(s)
outline
definition
counter-claim
some findings

2.2  Read the introduction and check your predictions (please add para numbers after each point).
·         Background on the development of the concept in question 1

·         Reference to famous research (Fama 1970; Malkiel, 1973) 1, 3

·         Explanation of key concept 1+ 2

·         Counter-claim 4

·         Outline of the issues under discussion 5

·         Aims of the paper 5

·         Findings  (rebuts counter-claim) 5

·         Structure (inferred). 5

·         Definition / clarification of terms. 1,2, 6

·         Clarification of the writer’s position on the issue 7

2.3 What is / are the main idea(s) of each of the introductory paragraphs? Make a note for each paragraph, using notes rather than complete sentences.
Para 1: Basics of EMH (Fama 1970) = prices quickly reflect all publicly available info so analysis à exceptional returns = imposs. Hypothesis generally accepted at that time.
Para 2: “Random walk” explained: future prices are unpredictable and independent of current prices
|  Para 3: Malkiel 1973: unpredictability àpassive index investment funds = as effective as active investment funds
| Para 4: New challenges to EMH: psych / behavioural = some predictability in prices + possibility of exceptional returns exist?
| Para 5 Paper aims: examine psych / bhvrl / event study challenges ie predictability and non-efficiency using market stats. Rejects these challenges: EMH as in para 1 holds |
| Para 6 Clarifies “efficiency” = efficient markets do not allow exceptional returns without above average risk (the idea of level of risk is new to students) |
|  Para 7 Accepts that pricing mistakes happen and psych factors do exist but in a random, unpredictable way, making systematic and exceptional returns impossible. EMH holds. |
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2.4  What is the writer’s own opinion of the EMH?

2.5  The writer defines two key terms in the introduction.

a) Find the terms & add para #, too

b) Identify each definition and the grammar used to present the definition.
c) Paraphrase each definition, thinking carefully about which word / expressions cannot be paraphrased.