Ag. Timmermann, LEARNING, SPECIFICATION SEARCH AND MARKET-EFFICIENCY - WITH AN APPLICATION TO THE DANISH STOCK-MARKET, The Scandinavian journal of economics, 95(2), 1993, pp. 157-173
A new methodology is adopted for testing semi-strong efficiency in fin
ancial markets where investors do not know the underlying data-generat
ing model. Based on ideas from the literature on learning, it is shown
that investors can use a dynamic significance criterion to conduct a
specification search and select a model from which predictions can be
computed recursively. Applied to the Danish stock market over the peri
od 1982-1991, a portfolio based on such recursive predictions is found
to provide a higher mean return with a lower variance than the market
index.