trends (heterogeneous beliefs). In addition, investors may have differ-
ent resources for acquiring and processing new information. As a
result, the notion of so-called bounded rationality has become popular
in modern economic literature (see also Section 12.2).
Still the advocates of EMH do not give up. Malkiel offers the
following argument in the section ‘‘What do we mean by saying markets
are efficient’’ of his book ‘‘A Random Walk down Wall Street’’ [9]:
‘‘No one person or institution has yet to provide a long-term,
consistent record of finding risk-adjusted individual stock
trading opportunities, particularly if they pay taxes and
incur transactions costs.’’
Thus, polemics on EMH changes the discussion from whether
prices follow the random walk to the practical ability to consistently
‘‘beat the market.’’
Whatever experts say, the search of ideas yielding excess returns
never ends. In terms of the quantification level, three main directions
in the investment strategies may be discerned. First, there are qualita-
tive receipts such as ‘‘Dogs of the Dow’’ (buying 10 stocks of the Dow
Jones Industrial Average with highest dividend yield), ‘‘January
Effect’’ (stock returns are particularly high during the first two Janu-
ary weeks), and others. These ideas are arguably not a reliable profit
source [9].
Then there are relatively simple patterns of technical analysis, such as
‘‘channel,’’ ‘‘head and shoulders,’’ and so on (see, e.g., [7]). There has
been ongoing academic discussion on whether technical analysis is able
to yield persistent excess returns (see, e.g., [17–19] and references
therein). Finally, there are trading strategies based on sophisticated
statistical arbitrage. While several trading firms that employ these strat-
egies have proven to be profitable in some periods, little is known about
persistent efficiency of their proprietary strategies. Recent trends indi-
cate that some statistical arbitrage opportunities may be fading [20].
Nevertheless, one may expect that modern, extremely volatile markets
will always provide new occasions for aggressive arbitrageurs.
In this chapter, a few abstract statistical notions such as IID and
random walk were mentioned. In the next five chapters, we take a short
14 Financial Markets

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