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Looking for the Evidence

What is the evidence that markets learn slowly? Three categories of studies are relevant to answering this question. The first set looks at stock prices over time to see if they reveal a tendency to move in the same direction for extended periods of time. The second set looks at how markets react to news about a firm—earnings and dividend announcements, for instance—and how prices adjust to the new information. The final set looks at mutual funds for evidence that mutual funds that have done well in the past continue to do so in the future.

Serial Correlation in Stock Price Drifts

In Chapter 8, when looking at contrarian investing, you considered the evidence on whether stocks that have gone up are more likely to go down in the future. The evidence that was presented on the correlation between price changes in consecutive periods in that chapter is relevant for momentum investing as well. After all, contrarian and momentum investors take opposite views of the world, and evidence supporting one strategy has to be viewed as rejecting the other.


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