Replicating the Stylized Facts of Financial Markets

Abstract

The Efficient Market Hypothesis (EMH) has been the cornerstone of finance for more than thirty years [392]. In 1978, Jensen claimed that no other hypothesis in economics had more empirical support [201]. He also acknowledged, though, that as econometric sophistication increased, more and more inconsistencies arose that could no longer be ignored. The years following this statement saw the ascent of behavioral economics, a new approach to financial economics that further amassed anomalies in apparent contradiction to the EMH. The interpretation of the empirical results, however, is often impeded by the fact that the EMH may be expressed in a number of ways, some of which are not equivalent and are differentiated only by subtle technicalities [245, 84].