Dan dan_ust at yahoo.com
Wed Jun 24 13:51:21 UTC 2009

--- On Tue, 6/23/09, Rafal Smigrodzki <rafal.smigrodzki at gmail.com> wrote:
> On Mon, Jun 22, 2009 at 11:35 AM, <dan_ust at yahoo.com> wrote:
> >
> > --- 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.
> ### But all relevant data are never even known, much less
> factored in.

Exactly.  This should lead one to immediately question the EMH -- rather than look for ways to add epicycles to get it to work.

> >> I thought that this is so only the the strong-
> >> or to a
> >> lesser extent semi-strong form of the hypothesis.
> The weak
> >> form only
> >> says that prices follow a random walk and analysis
> of past
> >> prices
> >> cannot be used to reliably achieve above-market
> returns.
> >
> > But this weakened form is so weak that it doesn't
> really predict much -- save that _pure_ technical analysis
> will likely fail in the long run.  But pure technical
> analysis is not the only tool or even the most used tool at
> the disposal of entrepreneurs in general or just people in
> asset markets.
> ### Yeah, sure, this is why some people make consistently
> money on the
> market in the long run.

Which would contradict the EMH, no?

> >> I tend to
> >> believe EMH in its weak form, aside from minor
> >> inconsistencies ( such
> >> as high performance of low P/E stocks).
> >
> > How would you explain the current crisis in light of
> the EMH?
> ### Part of it was crude government insistence to jettison
> sound
> lending practices, part of it was in the manner of a Ponzi
> scheme
> where some participants knew it would explode but hoped to
> realize
> gains before (some did), part of it was lack of experience
> with new
> financial instruments, part was government interference
> with bond
> ratings, interest rates, part of it was rational
> expectation of being
> bailed out. Add to it the usual agent-principal problem,
> the existence
> of centrally-issued money, the long feedback inherent in
> real estate
> transactions, dearth of short-sellers (due to both
> widespread
> prejudice and government persecution) and voila, you get in
> trouble.
> Weak EMH says only you couldn't predict that from technical
> analysis
> of previous prices, but some smart people saw what was
> going on, and
> did beat the market.

But all of these things should, according to the EMH, be taken into account, no?  IIRC, we've even seen one person here argue that government intervention won't matter because markets will somehow adjust and take this into account.  Were this so, there would never be any bad effects of anything on the market.  All agents would immediately factor in the bad effects and adjust their actions accordingly.




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