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Efficient Market Hypothesis and Forecasting

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  • Timmermann, Allan
  • Granger, Clive
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.

Suggested Citation

  • Timmermann, Allan & Granger, Clive, 2002. "Efficient Market Hypothesis and Forecasting," CEPR Discussion Papers 3593, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:3593
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    References listed on IDEAS

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    More about this item

    Keywords

    Efficient market hypothesis; Forecast evaluation; Model specification; Learning;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General

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