Dan dan_ust at yahoo.com
Wed Jun 24 14:37:10 UTC 2009

--- On Tue, 6/23/09, Stathis Papaioannou <stathisp at gmail.com> wrote:
> 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.

Yes, of course.

> 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.

I'm not sure what point you're trying to make here.  I believe EMH assumes markets in equilibrium.  Further, real markets are never in equilibrium.  If you agree with that -- viz., real markets are never in equilibrium -- then do you agree this creates problems for EMH?  Or do you believe EMH doesn't rely on an equilibrium assumption?

Regarding "regress[ing] to the mean," don't you think this requires an underlying assumption of equilibrium?  If markets are never in equilibrium -- whether they're coordinating in a Hayekian/Kirznerian sense, or discoordinating in a Schumpeterian/Schacklean/Lachmannian sense -- then what does it mean to "regress to the mean"?  (No pun intended.)  If you know the mean, then you'd be able to beat traders with regularity, no?  But that'd violate EMH, so why would anyone trade above or below the mean to begin with?  Wouldn't all or most traders find the mean and not violate it?  That they don't do so or that they disagree over just what the price of an asset should be (heck, why would they trade otherwise?*) seems a problem for EMH, no?



*  Of course, I'm assuming people are trading purely for a money profit.  I..e., someone buys an asset because she or he expects its price to rise at some future time, while someone sells the same assets because she or he expects its price to not rise or even fall at some future time.  People can trade for a variety of motives and all trades of all things are based on the expectation that each party will be better off for making the trade.  This need no create conflicts -- as when the farmer trades grain for, say, fish from the fishmonger.  The farmer values the fish more than the grain, the fishmonger values the grain more than the fish -- and both expectations could be met without either side later regretting the trade.  (Of course, they might.  Also, note that there is no equality in trade here; trade is based on inequality.  If the fishmonger valued the fish as much as the grain and the farmer valued the grain as much as the fish, there'd be no reason
 to trade at all.  It's only because each party values what they have less than what the other party has that a trade is even contemplated.)


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