My inquiry has the intent to understand your beliefs, not offend them. Please keep this in mind. As for myself, I'm in academic finance, and I believe in a somewhat strong market efficiency with the exception of a few ever present cases, that are inherently, ever changing. I've acquired these from the extensive empirical research done by myself, and by my peers. I'm very curious as to why some do not adhere to various portfolio strategies that are based around somewhat efficient markets. With the enormous amount of academic and industry research that supports the idea of efficient markets, why do some reject the evidence presented? Personally I think ones belief can reside in of of many choices, but I find the most respectable to be those who have empirical evidence collected and tests run against the idea of market efficiency. The others I have noticed are usually some sort of mix of misinterpreting personal accounts of survivorship bias as the only empirical evidence needed and/or outright rejection of respected empirical evidence without justification. I want to hear what traders here think of such ideas.
While I haven't done doctoral level work, I do have a strong academic background in finance. The EMT was something I rejected very early on (undergraduate to be exact) because the assumptions do not hold up. One of them has to do with efficient distribution of information. People neither receive nor react to information in the manner assumed by the theory. This was made very apparent to me in my first job when I found out that a particular weekly data report was released to the traders on the exchange floor 15 minutes before it was reported to the public. The EMT also assumes rational behavior by market participants. As recent events have cleared demonstrated, that is a very, very dangerous assumption. Emotions, even among the supposed smart money participants, can quickly come to dominate all other considerations. Put simply, if markets were efficient, we would not have the kind of volatility that we do. Maybe that's what you mean by "ever present cases" of market efficiency. Clarrification of that point would be worthwhile. I'd also be curious to hear what you mean by "portfolio strategies that are based around somewhat efficient markets". To my mind, markets are mostly efficient most of the time, especially the higher volume ones. I don't know if that's what you mean by "somewhat efficient", or if you are using that term to describe a position on the EMT spectrum between weak and semi-strong or semi-strong and strong. I was, however, under the impression that recent research has essentially moved away from efficient markets. I haven't seen the stuff myself, but I have a professor friend who keeps me a bit updated on trends.
Markets don't move the way academics think they do. Markets move because more people are making a bet or trying to get out of a bet in one direction than another. Whenever this happens, there is inevitable inefficiency - the market's normal, day-day process it not fullproof and the market constantly provides clues as to where it will go. Constantly. Clues that you can easily empirically test yourself if you spend time trying to trade. Let's say a given *efficiently priced* stock is trading at 49.23 1000 bid by 49.26 2000 offered, and I buy 5000 shares crossed through 49.39 and put in a 5000 share bid at 49.35. Now people are paying the offer at 49.45. The stock is now priced higher by 20 cents, or .4%, because of my individual order. How other participants react to my order and what other buyers have an intention of putting buy orders in my stock in the future will determine who makes and loses money on the above hypothetical trade. Sometimes a stock will be efficiently priced, blablal, and before news becomes public, some guy comes in buying it up for 1.5 points... and you got in after he bought it up for 50 cents and held it for 75, on 2000 shares. You made $1500 becuase you recognized that buyer. Later in the day the "efficiently priced" news comes in. So I guess, as traders, we *are* pricing information into the market, even though we don't know what the information is, and we get paid for the service... though this isn't personally how I view trading at all.
Like Will mentioned, the average person doesn't understand how instruments actually trade intraday. A funny example was when I was audited for a trade reporting error and had to dig up my trade price. The clearing firm was not being helpful so the IRS agent asked me why can't I just look it up in the Wall Street Journal from that day. She had been an auditor for 18 years. I was shocked. If the market really were efficient then stocks would trade at choppy levels rather than a smooth transition from one price to the next. For example look at CWTR today...bad news before the open. But why is it trading lower now then at the open? Nothing fundamental has changed, the news is priced in right??? EMT just doesn't hold water unless you are talking about time frames of a week or more imo.
Markets are efficient? Coulda fooled me. Where exactly was this efficiency over the last three days? I guess the net worth of the economy changed 1-2% on those days? Efficient Markets is the mantra used by academics and quants to complain when things get inefficient. Where was the market efficiency in early August. I can't fathom why anybody believes that BS.
http://news.yahoo.com/s/csm/20070830/ts_csm/asubprime These mortgages all bundled up and neatly packaged as fixed debt instruments might not be so efficient in hindsight. Wonder how the academics and quants quantified all that at inception? Time to pull those worn calculators out (of tattered pocket protectors) and recalculate those assumed constants which were variables in the equation since day one. In plainspeak, get ready for the next round of mega-defaults coming to inefficient stock markets, soon
"I'd be a bum on the street with a tin cup if the markets were always efficient" --Warren Buffet How many well meaning academics argued that markets follow a normal random distribution for years, while quietly sweeping 10 sigma events under the rug? It wasn't until mandelbot pointed out the seemingly obvious, and even then there was stiff resistance, until other academics, like andrew lo, gradually began to turn away from the established theories. LTCM is the quintessential example of how even the best, most established theories can go horribly awry when facing practical reality. EMH is simply what it says it is, a hypothesis, i.e. speculation- not an absolute theory.
Academic theories are just that, academic theories. I never met one author or proponent who actually traded day to day and still felt markets were efficient as hypothesized. I think most theories start with a lot of unrealistic assumptions to get to an environment in which they can put a theory to.
What is your definition of market efficiency? With market manipulation and economic and political and corporate (fraud scandal) or economic 'disruptions' markets are inefficient occasionally.