Efficient Market Hypothesis and Forecasting

29 Pages Posted: 20 Nov 2002

See all articles by Clive W. J. Granger

Clive W. J. Granger

University of California, San Diego (UCSD) - Department of Economics; Tinbergen Institute

Allan Timmermann

UCSD ; Centre for Economic Policy Research (CEPR)

Date Written: October 2002

Abstract

The efficient market hypothesis gives rise to forecasting tests that mirror those adopted when testing the optimality of a forecast in the context of a given information set. However, there are also important differences arising from the fact that market efficiency tests rely on establishing profitable trading opportunities in 'real time'. Forecasters constantly search for predictable patterns and affect prices when they attempt to exploit trading opportunities. Stable forecasting patterns are therefore unlikely to persist for long periods of time and will self-destruct when discovered by a large number of investors. This gives rise to nonstationarities in the time series of financial returns and complicates both formal tests of market efficiency and the search for successful forecasting approaches.

Keywords: Efficient market hypothesis, forecast evaluation, model specification, learning

JEL Classification: G0

Suggested Citation

Granger, Clive W. J. and Timmermann, Allan, Efficient Market Hypothesis and Forecasting (October 2002). Available at SSRN: https://ssrn.com/abstract=353300

Clive W. J. Granger (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

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858-534-3383 (Phone)
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Tinbergen Institute ( email )

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Netherlands

Allan Timmermann

UCSD ( email )

9500 Gilman Drive
La Jolla, CA 92093-0553
United States
858-534-0894 (Phone)

HOME PAGE: http://rady.ucsd.edu/people/faculty/timmermann/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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