markets as efficient or inefficient is perhaps too sharp a distinction. A more realistic version of market efficiency would admit that investment activities such as GTAA are required to push markets toward equilibrium valuations and that efficient markets still allow for some degree of profitable activities designed to take advantage of what are traditionally considered market inefficiencies. Investor behavior drives long-term overreaction and short-term underreaction to information. Who wants to own-much less acknowledge that they own-a stock that dropped significantly in price? Often these are companies with poor operating results where news stories convey only pessimism about the companies' future prospects. The same often holds for asset classes and countries. Japan, for example, which has endured a decade of economic decline in the 1990s and the beginning of the twenty-first century, shows only sluggish growth. As it happens, we believe investors have overreacted to the Japanese story, and believe Japanese equity prices will rise relative to the rest of the world. The underreaction effect is based on a we 11-documented finding that investors underreact to new information in the short term. The primary result supporting this conclusion is the so-called "post-earnings-announcement drift."10 In the nine-month period following an earnings surprise-whether positive or negative-the firm's stock price drifts relative to the aggregate market in the same direction as the earnings surprise. Post-earnings-announcement drift also holds in country equity markets, with negative earnings-surprise countries drifting downward relative to the world, and positive surprise countries drifting upward. Market segregation means that there are constraints on the free flow of capital across countries or markets. For example, in Korea 20 years ago, due to regulatory restrictions it was difficult for Koreans to hold foreign securities and for foreigners to hold Korean securities. This caused a disequilibrium in global capital markets, as Koreans could not diversify their portfolios and therefore demanded a higher return for Korean equity risk. The diligent foreign investors who determined ways around these restrictions benefited in two ways. First, they earned higher returns than the rest of the world due to the higher price of equity risk, and second, they earned even higher returns as the market desegregated and the price of equity risk declined, further pushing upward Korean stock prices. Market segregation still exists in some developed markets today. Canada, for example, continues to limit the amount of foreign property that Canadian investors may own. Finally, there are governments and central banks that are non-economically motivated participants in global capital markets. Central banks routinely use currency trades and monetary policy to influence exchange rates. However, free-floating exchange rates guarantee that the aggregate market participants will ultimately determine the equilibrium exchange rates. In that sense, central bank activity in currency markets is at best a short-term policy of "leaning against the wind" that capital markets eventually correct. Governments also periodically in- 10See Foster, Georg, Chris Olsen, and Terry Shevlin, 1984, "Earnings Releases, Anomalies and the Behavior of Security Returns," Accounting Review, October, 574-603, and Bernard, Victor, and Jacob Thomas, 1989, "Post-Earnings Drift: Delayed Price Response or Risk Premium?" Journal of Accounting Research 27, 1-36.