[ExI] EMH/was Re: Psychology of markets explanations

Stathis Papaioannou stathisp at gmail.com
Tue Jun 23 11:19:41 UTC 2009

2009/6/23 <dan_ust at yahoo.com>
> --- On Fri, 6/19/09, Rafal Smigrodzki <rafal.smigrodzki at gmail.com> wrote:
> > On Fri, Jun 19, 2009 at 3:09 PM, <dan_ust at yahoo.com> wrote:
> >> The EMH assumes that market prices are in
> >> equilibrium and factor in all relevant data.
> >
> > ### Does it?
> Yes.  It's only in equilibrium that no one in the market would be able to beat current prices.  I.e., there are no opportunities for profit in equilibrium: everyone would be in an optimal state and any deviation from this would induce a loss.

The price of many traded securities often swings widely within a
matter of minutes, even seconds. This might happen in the absence of
any obvious new information. Nevertheless, the price movements must be
in response to *some* information, even if it is that an individual
trader came back grumpy after lunch. That sort of information gives
rise to "noise", but it is no different in principle to any other sort
of information. It's not as if there is a universally accepted formula
to show how much the oil price should vary in response to political
turmoil in Iran, for example. There is never truly any equilibrium,
only periods of greater and lesser price stability, which are
themselves unpredictable. Of course every trader believes he can see
which way the wind is blowing better than anyone else, but over a long
enough time period they all regress to the mean.

Stathis Papaioannou

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