Fad, Martingales, and Market Efficiency

Author(s): BRUCE N.LEHMANN

Abstract: Predictable variation in equity returns might reflect either(1) predictable changes in expected returns or (2)market ineffciency and stock price "overreaction" .These explannations can be distinguished by examining returns over short time intervals since systematic changes in fundamental valuation over intervals like a week should not occur in efficient matkets.The evidence suggests that the "winners" and "losers" one week experience sizeable return revesals
the next week in a way that reflects apparent arbitrage profits which persist after corrections fot bid-ask spreads and plausible transactions costs.This probably reflects inefficiency in the market for liquidity around large price changes.

Lehmann 90 QJE.pdf