The hypothesis of efficient markets is badly specified as its impossible to falsify. To my mind its utterly pointless.
So your approach to theories is that you believe them until evidence comes out to disprove them? That seems a strange way to build a set of beliefs. Stocks do not go up in almost every country. First of all, any country that went communist, had a revolution, was invaded/annexed, or defaulted on sovereign debt generally saw a 100% loss on capital for people who invested. Almost any country that imposed capital controls and kept them in place for more than a few years saw a near 100% loss for any foreign investor. Any country which had hyperinflation had a near 100% loss on capital (in real terms) for investors. Look at stocks and bonds that were around in 1800. How many have not gone bust or defaulted since then? Without the benefit of hindsight, how would an investor have known to choose the US, Switzerland, and the UK instead of Argentina, France, and Germany? The latter would have handed investors a 100% loss on capital. Any index of stock performance has to take account of the losers as well as the winners. If you were a resident of any of the countries that went communist, imposed capital controls, or suffered hyperinflation, then you would have lost everything. You are only saying stocks always go up in the long run because by pure chance you happened to be born in a country which has remained capitalist, not suffered invasion/annexation, and has not had a period of hyperinflation. That is a clear case of survivorship bias.
"Also what about floor traders, have we seen any studies showing that the performance of market makers or locals is just as mediocre as mutual fund managers? What about arb shops? DE Shaw, Citadel etc?" I've come across several academic studies showing market makers tend to be on the right direction of the trade more often than not. Could it be that they are just more rational thinkers than the the collective crazy aggregate of losing irrational traders? Or maybe they are just more lucky, perhaps? Let's be frank, information is absolute power in this business. Access to information eclipses any boundaries set by theories of rational participants. There will always be an imbalance of spoils directly proportional to the non level dissemination of information IMO.
The problem with "insider" information is knowing how the market will react to that information. I may know that a companies results will be worse than expected. So I short the stock. The news hits the market and guess what the stock go's up! Why because, blah blah blah the guidance blah blah. So whats my information worth. In only a few cases is information worth anything, for example the company is bankrupt, its going to go to near zero, if I can short it before everybody else I will make cash. Have a look at the Enron executives, selling as they knew they where bankrupt and all the while smiling and telling everyone to buy. So the Enron execs were bluffing. Its more akin to a poker game than an efficient market.
First of all, efficient market is a theory and is not a fact. Secondly, in reality, there is no single right price for an asset at a particular point in time due to different discount rates used by investors. To an ordinary investor, a stock might worth $10, but to a corporation (with the intend of acquiring the whole company to generate synergy), it might worth $15. With this valuation variance exist in the market, trading opportunity arise. Thirdly, market manipulation is present. Lastly, we are the ones that make the market more efficient since we provide liquidity to all price levels. Market wouldn't be as efficient if liquidity is low. I hope this answered your question. Pension Admin
efficient market is indeed a theory, but as he said it relies on empiric experience gathered by hundreds of researchers worldwide.
A strong case can be made for EMH but keep in mind there are varying degrees of EMH so you can't lump all aspects of EFT together.
I agree, but when trying and plan your moves, relying on gathered experience can be beneficial. look at physicists for example, they can't explain anything about quantum physics, but they have a theory that's consistant with what they see during experiments, so they pretend it's true...
Theory is good for explaining majority of the outcomes in a population, but it does not mean that there is perfect cause and effect relationship. There is also (and always) a chance where the researcher fail to reject the hypothesis when it is indeed false (Type II Error). As well, if you look at the one day price chart of a stock, the price should stay constant at one price level on the day when there is no new information. However, price is never constant due to speculations. In addition, the economy is runs by expectations. Given that the stock market is a leading indicator of the economy, expectation plays a huge role in determining price. If expectations of individuals are different, price fluctuates which allows speculation to happen. Pension Admin
Dr. Olmifon, The E.T. forum is probably not a good place to debate the Efficient Market Hypothesis (EMH), because EMH is based on very long term investing and most respondents at E.T. are short term traders (thus the term Elite "Trader"). I will however ask you to click on the attached chart of the S&P 500, which represents the last 36 years of performance in percentage gain. Most long term investors would agree that it would have been almost impossible to outperform the EMH from 1972 to 2000, but the time period from 2000 to 2007 merely broke-even. Please explain to me how academics view a long period of non-performance when anyone with T-Bills could have outperformed the S&P 500 from 2000 to 2007? Does it even factor into the EMH? Jeff