The efficient market hypothesis states that it is impossible to outperform the market because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. According to the EMH, stocks always trade at their fair value on stock exchanges, making it impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. As such, it should be impossible to beat the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments.
We have seen various evidence that the EMH may not hold true though, and today’s example is a new paper from Gene Birz at Morgan Stanley, “Media, Asset Prices, and Market Efficiency“:
This paper finds strong statistically significant correlations between information in newspaper headlines about unemployment releases and stock returns on the day following the day of unemployment releases. This finding challenges the efficient-market hypothesis that stock prices immediately adjust to publicly available information as rational investors take positions to exploit arbitrage opportunities. The efficient-market hypothesis implies that information from the unemployment release should be fully incorporated in stock prices on the day information is released. Therefore, the finding of this study suggests that investors trade on old information reported in newspapers.
So it is in fact media headlines that are still driving the market.