The case for market inefficiency: Investment style and market pricing

The level of informational efficiency of security markets has been a contentious issue among the academic and broader community over the last 35 years. This study highlights the growth in popularity in investment styles over this period, where investment decisions are made with only limited reference to available information and no concern with fair value (eg momentum investors and index investors). This paper models the market behaviour of fundamental, momentum and index investors and then simulates the behaviour of security prices in a market composed of investors following these three styles. Evidence is found to suggest that compositions of investment styles that are fairly typical of the mix of investors in current-day markets will lead to anomalous price behaviour similar to that found by other writers: an underreaction to new information which often gives rise to a subsequent overreaction.