Stock Selection and Timing-A New Look At Market Efficiency

Previous tests of the weak form of market efficiency have examined whether information on past price movements can be exploited to enhance profits. These tests assume that investors are risk-neutral, even though the normative theory of portfolio selection assumes that investors are risk-averse. A st...

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Bibliographic Details
Published in:Journal of business finance & accounting 1988-09, Vol.15 (3), p.385-400
Main Authors: Frankfurter, George M., Lamoureux, Christopher G.
Format: Article
Language:English
Subjects:
Efficiency
Efficient markets
Expected utility
Investments
Market equilibrium
Portfolio selection
Random walk theory
Securities markets
Studies
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Summary:Previous tests of the weak form of market efficiency have examined whether information on past price movements can be exploited to enhance profits. These tests assume that investors are risk-neutral, even though the normative theory of portfolio selection assumes that investors are risk-averse. A study tests the informational efficiency of the stock market by exploring whether gains in expected utility are attainable by utilizing the time series of past stock prices. It is shown that stock returns do not conform to a random walk model or to the more general martingale model. However, there is no cause to reject the weak form hypothesis of market efficiency. Trends in a return series that could be used to increase profit are only inconsistent with the weak form market efficiency if investors are risk-neutral.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.1988.tb00142.x