Long-term readers of Angrybear know I often appeal to the logic of the Efficient Market Hypothesis (EMH). In comments to a recent post, one reader suggested EMH was so outdated that even Burton Malkiel has abandoned it. That claim surprised me in light of his April 2003 paper The Efficient Market Hypothesis and Its Critics:
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 … For me, the most direct and most convincing tests of market efficiency are direct tests of the ability of professional fund managers to outperform the market as a whole. Surely, if market prices were determined by irrational investors and systematically deviated from rational estimates of the present value of corporations, and if it was easy to spot predictable patterns in security returns or anomalous security prices, then professional fund managers should be able to beat the market … A remarkably large body of evidence suggesting that professional investment managers are not able to outperform index funds that simply buy and hold the broad stock market portfolio.
A couple of years later, Malkiel wrote Reflections on the Efficient Market Hypothesis: 30 Years Later:
In recent years financial economists have increasingly questioned the efficient market hypothesis. But surely if market prices were often irrational and if market returns were as predictable as some critics have claimed, then professionally managed investment funds should easily be able to outdistance a passive index fund. This paper shows that professional investment managers, both in The U.S. and abroad, do not outperform their index benchmarks and provides evidence that by and large market prices do seem to reflect all available information.
I’m not aware of a subsequent paper where Professor Malkiel has abandoned his long held view – but I’d appreciate it if someone would provide us with his latest thoughts.