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Testing Stock Market Efficiency with Compression Algorithms

Holger von Jouanne-Diedrich has a clever test:

One of the most fiercely fought debates in quantitative finance is whether the stock market (or financial markets in general) is (are) efficient, i.e. whether you can find patterns in them that can be profitably used.

If you want to learn about an ingenious method (that is already present in anyone’s computer) to approach that question, read on!

As soon as I saw the post, my Eugene Fama senses were tingling. The results are not surprising (at least, to anyone who got my reference in the prior sentence), but I did enjoy the rather clever approach to the question.

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