Forum Archive Index - December 2001

[David <dcary@southnet.co.nz>]

On Sat, Dec 08, 2001 at 09:27:19AM +1300, hugh webber wrote:
> Here below are quotes from an offline discussion between Phaedrus and myself 
>which I hope he won't mind me reproducing.
> 
> 
> The basis of Phaedrus' argument here is the "efficient markets hypothesis" 
>which is a tenet of economics theory but is increasingly
> questionned by economists, particularly practical economists who get to grips 
>with the real world.
> There is a variable gap between the actual price of a share and what it 
>should be if there was costless and instant information and
> if all players did their homework and equally good analysis and acted 
>rationally and without favouritism (were not 'in love with a
> share').
> 

from memory, regarding the efficient market hypothesis:

        The Weak Form
        -------------
Market price fully incorporates all past price information. Therefore 
TA of past price movements can not theoretically yield any useful 
info on future price movements. The Random Walk Hypothesis which 
states that price movements cant be predicted from historical trends 
because prices are random is a form of the weak form of the EMH. 
Markets have been shown not to follow a random walk, there are many 
well known anomalies, in the very short term. However a liquid
and active market will be close to being random in the traditional
sense.

        The Semi-Strong Form
        --------------------
Market prices fully incorporate all publically avcailable information.
This forms the basis of many event studies, which show how quickly
prices adjust to a public announcement.

        The Strong Form
        ---------------
Market prices incorporate all information, including that held by 
insiders etc. This could be the case in a perfectly competitive 
enviroment. I am not shure that any market has been shown to be 
strong form efficient. And the EMH assumes perfect competition
in the academic sense. 

I think that the foreign exchange market and fixed interest markets 
in the major currencies may be considered very efficient. Although
the stock markets have improved in leaps with automated trading
and important advances in information technology.

The EMH suggests very strongly that technical analysis can not 
generate an abnormal return except by luck. The EMH suggests that
the buy and hold strategy of the fundamentalist is, in the long
term, the most sensible option.

Information is king and insider trading may be the only way of 
consistently outperforming the market. <g> 

My 2c only. 
-- 
David Elsmore-Cary
    dcary@southnet.co.nz
    
----------------------------------------------------------------------    
The only leaf it drops goes wide,
Your name not written on either side.
You linger your little hour and are gone,
And still the wood sweep leafily on,
    Robert Frost
    On Going Unnoticed
======================================================================    

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