> --- Alypius Skinner <[EMAIL PROTECTED]> wrote: > > A statistical physics model is predicting that the US stock market > > recovery suggested by recent rises will only last until spring next year, > > before tumbling yet further. > > Why would this contradict efficient markets?
I originally called this message "physicists discover anti-bubble;" just in case that was one the two possible reasons the message did not appear on the list, I retitled it to be obviously pertinent to economics. (But I also cross-posted the first time, so maybe that was the problem.) Of course, that is not my complete answer to your question. > > The efficient-market proposition does not imply any absence of > fluctuations, nor does it imply any limitation on the rise and fall of > asset prices. It states that prices take into account public beliefs. If > the expectation is that others will buy the assets at higher prices, then > why would it be inefficient for the price to rise? It has always seemed to me that the "greater fool" theory is incompatible with market efficiency. If prices really are going up for a period of time solely on expectation that someone else will always be willing to pay prices even more unjustified by business fundamentals than the price the previous buyer paid, then it would be possible to predict that the overbid stocks will inevitably move downward by a large amount. That sort of extreme price distortion should not be possible in a highly efficient market. After all, all stock purchases are made in expectation that the price will go up in the future (which can only be because other buyers will be willing to pay more for them). If that is what you mean by an "efficient market" then to say that securities markets are efficient becomes a tautology rather than a theory. > > It seems to me that "efficient markets" is a micro phenomenon on specific > assets at some moment ex ante, not a proposition about the whole financial > market over the long term ex post. > > Fred Foldvary So are you saying that the market pricing of some stocks are efficient, but not the pricing of others? If the pricing of all (or nearly all) individual assets are efficient, then the market as a whole for these assets must be efficient. If a large number of securities are irrationally priced (based on business fundamentals) at any given time, then one can not speak of an "efficient market," because the market average as a whole will become distorted by the large number of "mispriced" securities. Also, if the market (or the vast majority of its individual components, if one wishes to focus on the individual trees rather than the forest) are efficiently priced from, say, day to day, then "the whole financial market over the long term" must be efficient. The whole market cannot be inefficient over the long term if its individual component assets are efficiently valued at any given moment in time. Of course, an economist or historian may say, "In the long run, markets will rise" (or an astronmer or geologist may say, "Over the long run, the markets will go to zero") for fundamental reasons without contradicting the efficient market hypothesis--but one should not be able to use a statistical analysis to correctly predict the ups and downs of market averages if the efficient market hypothesis is correct. The markets may or may not be efficient, but the term must be defined in some way that has enough objective meaning to be analyzed and tested. ~Alypius Skinner > > > ===== > [EMAIL PROTECTED] >
