Efficient Market Hypothesis and Forecasting

Clive W. J. Granger and Allan Timmermann ()

No 3593, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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; learning; model specification (search for similar items in EconPapers)
JEL-codes: G0 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-ets
Date: 2002-10

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Journal Article: Efficient market hypothesis and forecasting (2004)
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