Joint hypothesis problem
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Market efficiency implies stock prices fully reflect all publicly available information instantaneously, thus no investment strategies can systematically earn abnormal returns. Fama (1991) argued that stock prices respond instantaneously and without bias to new value relevant information and that security returns over time are determined only by changes in the market level and individual stock risk. Therefore, there are no profitable investment opportunities from superior analysis, which implies no one can consistently outperform the market. The precondition for this 'strong' definition is that information and trading costs are always equal to zero. This is clearly not true in practice.
Stock market anomalies are violations of market efficiency hypothesis in which consistently abnormal returns can be earned by on some investment strategies that are constructed based on potential market inefficiencies.
The joint hypothesis problem refers to the fact that testing for market efficiency is problematic, or even impossible. Any attempts to test for market (in)efficiency must involve asset pricing models so that there are expected returns to compare to real returns. It is not possible to measure 'abnormal' returns without expected returns predicted by pricing models. Therefore, anomalous market returns may reflect market inefficiency, an inaccurate asset pricing model or both.
In sum, joint hypothesis problem implies that market efficiency per se is not testable.
- FAMA, E.F., 1991. Efficient Capital Markets: II. The Journal of Finance, 46(5), pp. 1575.