4 Hours wrote:GT2211 wrote:-I don't agree necessarily that the findings of behavioral economists have been viewed with suspicion by the mainstream. That Kahneman won a Nobel is I think evidence of this.
Joseph Stiglitz won a Riksbankspris too. That doesn't mean the field as a whole has taken what got him the prize, namely his work on imperfect information to heart. Nor has it taken to heart any other deviant things he's said about things like globalization, including the Bretton Woods institutions. That's why he quit his office at the World Bank.
Stiglitz work on information asymmetry is a major part of financial economics and RePEC's rankings based on influence/importance has him 4th.
The Weak form of the EMH merely asserts that asset prices fluctuate in a random way.
"Random" needs clarification. Are you talking about Gaussian fluctuations in price?
Someone else here may be more familiar with this than I am, but based on the interview below it does not seem that Fama believes that the EMH implies a bell curve type distribution.
http://www.dimensional.com/famafrench/2 ... curve.htmlAnd what happened to the part about the prices reflecting all available public information? The weak form sounds like saying that stock prices are somehow stochastic, which is not especially controversial and not, in the technical sense, necessarily a sign that markets are efficient.
I don't believe the weak form actually requires markets to reflect all available public information at all times.
The weak form of the efficient market hypothesis describes a market in which historical price data are efficiently digested and, therefore, are useless for predicting subsequent stock price changes. This is distinguished from a semistrong form under which all publicly available information is assumed to be fully discounted in current securities prices. Finally, the strong form describes a market in which not even those with privileged information can obtain superior investment results
http://www.cob.unt.edu/firel/Kensinge/Fina4200/Mkt_Efficiency.pdf
And as Noah Smith wrote in his 'In Defense of EMH'
Noah Smith wrote:First of all, people should realize that the EMH is misnamed - it's not really a hypothesis, it's not about "efficiency" in the economic sense of the word, and it's not unique (so it shouldn't have a "the" in front of it). Some of this miswording was just semantic clumsiness on the part of the people who came up with the theory. Some was sloppy science.
The "efficient" part of "EMH" doesn't mean that financial markets lead to a Pareto-efficient outcome. You could have externalities - for example, every time you make a financial transaction, God might kill a kitten - and the market could still be "efficient" in the way that financial economists use the term. Similarly, a vastly "inefficient" financial market might be Pareto efficient, since it might only be possible to make profits by taking advantage of someone else's stupidity.
The "efficient" actually just refers to information-processing efficiency. What that basically means is that if there's some piece of information out there - some fact about a company's balance sheets, or some pattern in past prices, etc. - the market price should reflect that piece of information. That's what "efficient" means here.
But exactly how should prices reflect information? Here's the bigger problem with the term "EMH" (the "sloppy science" part) - it's not really a hypothesis. How prices reflect information will always depend on people's preferences. In finance, preferences include preferences about risk. So without a measure of risk, it's impossible to scientifically test whether or not prices incorporate information. To be a real hypothesis, the EMH needs to be paired with a specification of risk (or, more generally, a hypothesis about people's preferences with respect to uncertainty and time, and a hypothesis about the sources of risk). And since there are many possible such specifications, there isn't just one "EMH"...there are infinite.
To complicate things, "the EMH" says nothing about how long it takes for the market to process information. So even if an EMH happens to be true at one frequency (say, daily), it might not be true at the 1-second frequency.
http://noahpinionblog.blogspot.com/2013 ... f-emh.html