American Financial Market Efficiency Pre and Post Internet Adoption

Abstract

The Efficient Market Hypothesis (EMH) has been a topic of intrigue to· investors since gaining traction in the early 1970s. One assumption of the strong-form EMH is the idea of perfect information- that prices of assets fully reflect all public and private information. Beating the market should be a 50/50 shot. Examining the returns of Berkshire Hathaway are telling: beating the market 39 times out of the past 48 years certainly doesn't seem to be by chance at all .. Over this long period of time, the EMH fails to explain the returns of investment firms like BRKA's. This fails to take into account many factors though: namely technology. The advent of the internet completely changed financial markets, as it allowed for quick and easy access to information that once took hours of research. The result: a massive difference in BRKA's returns pre and post 1995 :-the year the internet was released to the public. Statistical analysis in R reveals the significance of this difference from the EMH. Also, theoretical markets of 2001, the year internet adoption in the U.S. hit 51% and 1981, two decades earlier, are analyzed to· look for further trends to reinforce findings.