A Case Against the Efficient Market Hypothesis

Abstract

This study critically evaluated the applicability of the Efficient Market Hypothesis to real financial markets from a behavioral finance basis with a focus on the value anomaly. Specifically, a study was composed to analyze the risk and return characteristics of value stocks in order to gain a greater understanding of the anomaly in which value stocks frequently outperform. The study examined the returns and risk characteristics of value stocks relative to growth stocks over both positive and negative market environments, with special attention given to the change in the return and risk profile of value stocks as the environment moved from positive to negative. The study found that value stocks consistently outperform in all market environments, a finding inconsistent with the Efficient Market Hypothesis. The study also showed that the degree of outperformance of value stocks is likely due to more than a risk premium alone.