Essay About Stock Prices And See E. F.Fama.And K. French

Evidence Against Emh
Over-reaction and Under-reaction
The efficient markets hypothesis implies that investors react quickly and in an unbiased
manner to new information. In two widely publicized studies, DeBondt and Thaler
present contradictory evidence.17 They find that stocks with low long-term past returns
tend to have higher future returns and vice versa – stocks with high long-term past returns
tend to have lower future returns (long-term reversals).
These findings received significant publicity in the popular press, which ran numerous
headlines touting the benefits of these so-called contrarian strategies.18 The results
appear to be inconsistent with the EMH. However, they have not survived the test of
time. Although the issues are complex, recent research indicates that the findings might
be the result of methodological problems arising from the measurement of risk.19 Once
risk is measured correctly, the findings tend to disappear.
One of the most enduring anomalies documented in the finance literature is the empirical
observation that stock prices appear to respond to earnings for about a year after they are
announced. Prices of companies experiencing positive earnings surprises tend to drift
upward, while prices of stocks experiencing negative earnings surprises tend to drift
downward. This “post-earnings-announcement drift” was first noted by Ball and Brown
in 1968 and has since been replicated by numerous studies over different time periods
17 W. DeBondt and R. Thaler, “Does the Stock Market Overreact,” Journal of Finance (July, 1985).
18 For example, see B. Donelly, “Investors Overreactions May Yield Opportunities in the Stock Market,” Wall Street
Journal (January 7, 1988).
19 See E. F.Fama.and K. French, “Multifactor Explanations of Asset Pricing Anomalies,” Journal of Finance 51:55-
84 (March, 1996).
10.Efficient Markets Hypothesis/Clarke 19
and in different countries.20 After more than thirty years of research, this anomaly has
yet to be explained.
Another study