Project Description

This is a mimic of an approach of Fama and French. They tested whether we can predict stock returns based on past data. Fama (1970) wrote: "A market in which prices always “fully reflect” available information is called “efficient”". Similarly, Jensen (1978) wrote: "A market is efficient with respect to information set X if it is impossible to make economic profitsby trading on the basis of information set X" .

This is just a replication of those and related papers where different researches proved that and maintained that efficient market hypothesis works.

Hansen–Jagannathan bound

Hansen–Jagannathan bound is a theorem in financial economics that says that the ratio of the standard deviation of a stochastic discount factor to its mean exceeds the Sharpe ratio attained by any portfolio. This result applies, among others, the Cauchy–Schwarz inequality.

This is based on the paper of Fama and French (1993). On related research topics, researchers found that if arbitrage opportunity exists, it won't exist for long (because sooner or later everyone would start exploiting it).

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