Efficient markets hypothesis: Good or no good? « Economics Job Market Rumors

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Efficient markets hypothesis: Good or no good?

Economist
657b

Please just good my post, this isn't a poll. You'll just be hurtin those feelings otherwise.

How much acceptance of the EMH is there still among financial economists? Seems like huge swathes of the field are wholly reliant on its existence and simply assume that it does exist. Wouldn't the majority of asset pricing be completely useless since the models assume market efficiency?

Fama, French, and Cochrane are still in the camp. What about Robert Merton? Did any big name people change their views significantly?

Thanks everyone.

10 years ago # QUOTE 11 Volod 10 Vlad !
Economist
4d10

Im going to guess that the answer will be along the "it depends what precisely you mean by efficient markets" line

10 years ago # QUOTE 13 Volod 0 Vlad !
Economist
8c2f

Huge swathes of financial advisers etc are wholly reliant on it NOT being true.

10 years ago # QUOTE 1 Volod 1 Vlad !
Economist
9fb4

Huge swathes of financial advisers etc are wholly reliant on it NOT being true.
Empirical evidence suggests that analysts can reliable predict the direction of stock price movements (on average, in aggregate). However extracting a reliable trading strategy from this is more difficult, due to transaction costs. See: http://faculty.gsm.ucdavis.edu/~bmbarber/Paper%20Folder/JF_analyst.pdf

However if you are a large institutional firm which is able to minimise its transaction costs, its not implausible that stock picking could work, based on the actual empirical evidence (rather than financial theory.

10 years ago # QUOTE 1 Volod 0 Vlad !
Economist
9fb4

(of course, you need to separate out 'prediction' from self-fufilling prophecies since analyst recommendations influence market behavior)

10 years ago # QUOTE 2 Volod 0 Vlad !
Economist
f9f5

you think analysts aren't aware of their market power?

10 years ago # QUOTE 1 Volod 0 Vlad !
Economist
9fb4

you think analysts aren't aware of their market power?
Do markets react straight away (or within an hour or so) of changes in analyst recommendation? (I have no idea)

10 years ago # QUOTE 0 Volod 0 Vlad !
Economist
ae0c

Only if it's Jim Cramer. Otherwise, markets are a little (sometimes a day) behind analyst recommendations.

you think analysts aren't aware of their market power?
Do markets react straight away (or within an hour or so) of changes in analyst recommendation? (I have no idea)

10 years ago # QUOTE 0 Volod 0 Vlad !
Economist
547b

Huge swathes of financial advisers etc are wholly reliant on it NOT being true.

They are reliant on people believing it to be not true. It's not like most of them are remotely useful

10 years ago # QUOTE 1 Volod 0 Vlad !
Economist
a1f2

Two economists are walking down the street and they find a $20 bill...

10 years ago # QUOTE 2 Volod 0 Vlad !
Economist
ffd3

Once you take out the political interpretations the theory makes good sense.

10 years ago # QUOTE 2 Volod 0 Vlad !
Economist
f965

OP: Could you at least specify whether we are talking about the strong, semi-strong, or weak form? Even Fama has said he thinks the strong form is not likely to be true -- while most people think the weak form is true.

10 years ago # QUOTE 0 Volod 0 Vlad !
Economist
cbb0

I tend to go back and forth since there are three major versions of the hypothesis: "weak", "semi-strong", and "strong". The weak-form EMH claims that prices on traded assets (e.g., stocks, bonds, or property) already reflect all past publicly available information. The semi-strong-form EMH claims both that prices reflect all publicly available information and that prices instantly change to reflect new public information. The strong-form EMH additionally claims that prices instantly reflect even hidden or "insider" information. Critics have blamed the belief in rational markets for much of the late-2000s financial crisis. In response, proponents of the hypothesis have stated that market efficiency does not mean having no uncertainty about the future, that market efficiency is a simplification of the world which may not always hold true, and that the market is practically efficient for investment purposes for most individuals. What do you think?

10 years ago # QUOTE 0 Volod 3 Vlad !
Economist
cb5a

I think "a simplification of the world which may not always hold true" and "practically efficient for investment purposes for most individuals" are meaningless weaselwords to avoid the fact it is bullshit. This excuse is taking the Rubenstein-game theory approach.

10 years ago # QUOTE 0 Volod 3 Vlad !
Economist
d2c2

b5a9, then why don't you build us a model that is always and literally true. Then we can all stop being weasels. Good luck and let us know when you succeed.

10 years ago # QUOTE 3 Volod 0 Vlad !
Economist
8c2f

The only real-life significance of "efficient market hypothesis" is when humanities tards and political pundits misinterpret it as saying that free markets always works.

10 years ago # QUOTE 7 Volod 0 Vlad !
Economist
4d10

OP: Could you at least specify whether we are talking about the strong, semi-strong, or weak form? Even Fama has said he thinks the strong form is not likely to be true -- while most people think the weak form is true.
WHat makes me suspicious is whether they believe it because it is actually supported by evidence, or whether its just becuase it makes the mathematics easy. Economics (and finance particular) has a notorious history when it comes to using stupid and wrong models just because they let you do nice mathematics. Much of math finance is just completely ridiculous and makes no contact with the real world, although it was worse 15-20 years ago.

10 years ago # QUOTE 1 Volod 1 Vlad !
Economist
3d7f

http://faculty.chicagobooth.edu/john.cochrane/research/papers/AFA_pres_speech.pdf

10 years ago # QUOTE 0 Volod 0 Vlad !
Economist
ffd3

The only real-life significance of "efficient market hypothesis" is when humanities tards and political pundits misinterpret it as saying that free markets always works.

You mean the libertarians? Because lefties hate it for other reasons which many of them take out of context. I am sick of seeing libertarians on Fox and CNBC using this theory for purely ideological capital.

10 years ago # QUOTE 0 Volod 1 Vlad !
Economist
b046

Fate of the efficient market hypothesis: nonsense never dies out.

10 years ago # QUOTE 0 Volod 3 Vlad !

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