Investment EMH
The Stock Market is Efficient
- Only a minority of actively managed mutual funds beat the S&P index Active management Liu.
- Roughly half of "mutual funds" are actually "closet indexers" - essentially index funds that are technically "actively managed" to justify higher fees Active management.
International Financial Markets are Not Efficient
- Equity home bias puzzle - Most investors hold small amounts of foreign equity despite having a comparative advantage doing so. That being said, this irrational bias has shrunk over time. Equity home bias puzzle
- Feldstein–Horioka puzzle - assuming perfect capital mobility, there should be minimal correlation between the amount of savings by a country and the amount of investment in that country. In reality, however, there is significant correlation Feldstein–Horioka puzzle.
My Analysis
I looked at 100 stock's daily returns from 1984 to 2017 Marjanovic and modeled each daily price move as
Y_it = B_0 + B_i1 + B_i2 * X_t + B_i3 * Norm()
where Y_t is stock i's daily return, X_t is the normalized change in the overall stock index, B_0 is the average index return, and the three B_i parameters represent alpha, beta, and idiosyncratic risk, respectively.
Of the 100 stocks, 4 rejected the null-hypothesis that B_i1=0. I'd expect 5 to reject the null-hypothesis by chance alone, so this is to say that I found no statistical evidence that any stock reliably beats the market.
This is actually puzzling because 89 of the stocks rejected the null-hypothesis that B_i2=1, which means that many of these stocks did have different levels of risk. Moreover, B_i3 didn't correlate with B_i2, which means stocks with high systematic risk (beta) also tended to have high idiosyncratic risk.
This raises the question: why does anyone invest in high-beta stocks if there's no evidence they compensate their owners with higher returns or even lower idiosyncratic risk?