the null hypothesis is rejected when it is true b.

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the null hypothesis is not rejected when it is false c.

the research hypothesis is rejected when it is true d.

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the research hypothesis is not rejected when it is false722-1

Mr Lo has a novel idea for future crises: creating a financial equivalent of the National Transport Safety Board, which investigates every civil-aviation crash in America. He would like similar independent, after-the-fact scrutiny of every financial failure, to see what caused it and what lessons could be learned. Not the least of the difficulties in the continuing crisis is working out exactly what went wrong and why—and who, including financial economists, should take the blame.

the probability of rejecting the null hypothesis when the null hypothesis is true.

Term hypothesis Definition: A reasonable proposition about the workings of the world that's inspired or implied by a theory and which may or may not be true. An hypothesis is essentially a prediction made by a theory that can be compared with observations in the real world. Hypotheses usually take the form: "If A, the also B." The essence of the scientific method is to test, or verify, hypotheses against real world data. If supported by data over and over again, hypotheses become principles.

the null hypothesis is probably wrong b.

IN 1978 Michael Jensen, an American economist, boldly declared that “there is no other proposition in economics which has more solid empirical evidence supporting it than the efficient-markets hypothesis” (EMH). That was quite a claim. The theory's origins went back to the beginning of the century, but it had come to prominence only a decade or so before. Eugene Fama, of the University of Chicago, defined its essence: that the price of a financial asset reflects all available information that is relevant to its value.

The EMH, to be sure, has loyal defenders. “There are models, and there are those who use the models,” says Myron Scholes, who in 1997 won the Nobel prize in economics for his part in creating the most widely used model in the finance industry—the Black-Scholes formula for pricing options. Mr Scholes thinks much of the blame for the recent woe should be pinned not on economists' theories and models but on those on Wall Street and in the City who pushed them too far in practice.

the result would be unexpected if the null hypothesis were true c.

"I believe there is no other proposition in economics which has more solid empirical evidence supporting it than the Efficient Market Hypothesis."
Jensen (1978)

"If the efficient markets hypothesis was a publicly traded security, its price would be enormously volatile."
Shleifer and Summers (1990)

"It is disarmingly simple to state, has far-reaching consequences for academic pursuits and business practice, and yet is surprisingly resilient to empirical proof or refutation."
Lo in Lo (1997)

"Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as underreaction, and post-event continuation of pre-event abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to disappear with reasonable changes in technique."
Fama (1998)

"What, then, can we conclude about market efficiency? Amazingly, there is still no consensus among financial economists. Despite the many advances in the statistical analysis, databases and theoretical models surrounding the efficient markets hypothesis, the main effect has been to harden the resolve of the proponents on each side of the debate."
Lo (2000) in Cootner (1964)

Economic historian David Landes in his , though listing almost every factor that could potentially shape comparative development as significant, comes down most heavily on the side of culture, in fact, emphasizing the central role that Judeo-Christian culture plays in economic development (and we cannot resist but ask: why on earth England, so far from the center of Judeo-Christian culture, spearheaded the institutional changes and the Industrial Revolution, and places at the center of it such as Italy, Byzantium and the Balkans didn’t).

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  • Test the appropriate hypothesis at the 5% level.

    What is the calculated value suitable for testing the above hypothesis?

  • One can never prove the truth of a statistical (null) hypothesis.

    the probability of Y falling in the critical region when the null hypothesis is true is ALPHA II.

  • failing to reject the null hypothesis when it is false.

    The hypothesis test that followed ended with a decision of "reject H(O)".

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failing to reject the null hypothesis when it is true.

In the early years of the EMH, researchers spent little time worrying about the workings of financial institutions—a weakness of macroeconomics too. In 2000, in his presidential address to the American Finance Association, Franklin Allen, of the University of Pennsylvania's Wharton School, asked: “Do financial institutions matter?” Lay people, he said, “might be surprised to learn that institutions play little role in financial theory.” Indeed they might. Mr Allen's explanation was partly that the dominant theories had been shaped at a time when America, especially, was spared financial crises.

rejecting the null hypothesis when it is true.

Behavioural economists were among the first to sound the alarm about trouble in the markets. Notably, Robert Shiller of Yale gave an early warning that America's housing market was dangerously overvalued. This was his second prescient call. In the 1990s his concerns about the bubbliness of the stockmarket had prompted Alan Greenspan, then chairman of the Federal Reserve, to wonder if the heady share prices of the day were the result of investors' “irrational exuberance”. The title of Mr Shiller's latest book, “Animal Spirits” (written with George Akerlof, of the University of California, Berkeley), is taken from John Maynard Keynes's description of the quirky psychological forces shaping markets. It argues that macroeconomics, too, should draw lessons from psychology.

rejecting the null hypothesis when it is false.

One economist leading the effort to define that new paradigm is Andrew Lo, of the Massachusetts Institute of Technology, who sees merit in both the rational and behavioural views. He has tried to reconcile them in the “adaptive markets hypothesis”, which supposes that humans are neither fully rational nor psychologically unhinged. Instead, they work by making best guesses and by trial and error. If one investment strategy fails, they try another. If it works, they stick with it. Mr Lo borrows heavily from evolutionary science. He does not see markets as efficient in Mr Fama's sense, but thinks they are fiercely competitive. Because the “ecology” changes over time, people make mistakes when adapting. Old strategies become obsolete and new ones are called for.

Test at ALPHA=.05 the hypothesis that the true weight is 140 lb.

Financial economists also need better theories of why liquid markets suddenly become illiquid and of how to manage the risk of “moral hazard”—the danger that the existence of government regulation and safety nets encourages market participants to take bigger risks than they might otherwise have done. The sorry consequences of letting Lehman Brothers fail, which was intended to discourage moral hazard, showed that the middle of a crisis is not the time to get tough. But when is?

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