Efficient Market Hypothesis

The company Dimensional Fund Advisors works at the biggest US stock market. According to philosophy of Dimensional “It is certainly possible to outperform markets, but not without accepting increased risk.” (Markets Work, Dfaus.). Does this market agree to the Efficient Market Hypothesis clearly ending market attempts according to the weak, the semi-strong, and the strong forms of efficiency?

Situation at the US market. In fact, the Dimensional Fund Advisors work at the technically and managing advanced US market. However, “Today, most financial markets appear to be semistrong at best.” (Robert E. Wright, Vincenzo Quadrini). Semistrong market means that all the publically available information included in prices, and no fundamental analyses may be necessary.

The promising advantages. In spite the market prices can represent the most relevant information about the stocks it is not so easy to properly construe this information. No doubt, only the large enough sample size of the number of funds can present the key information. Only benchmark can properly measure how efficiently the market works. One more fact in support to the work of Advising Funds – the biased statistics, this fund belongs to the survived ones which always produce the better results than many non surviving funds.

The possible risks. According to James L. Davis these risks can be summarized as return predictability, financial market link to the real economy and performance persistence.

Return predictability means that investor can estimate only the mean time and stock return with small significance in predicting time or exact stocks’ name most likely to change.

Financial market link to the real economy. Very often the markets are sensitive to many variables for example of most efficient managers with a SAT score above 1420, however according to “Chevalier and Ellison's manager characteristics model can explain only about 5% of the total variation in mutual fund returns” (James L. Davis), because the style-adjusted passive benchmark model has proved to be more efficient in work of the average mutual fund than the active one (James L. Davis).

Performance persistence. The bulk information is provided in prices and most management efforts just can’t overplay the market. In fact the more efficient the market is the less is the need for the market expert services at all.

What is the model? Some variables can be used to predict returns such as the characteristics of the stocks (size, book-to-market, and momentum); however it is not clear whether of abnormal returns or just of some variations of returns.