"Long-ago proven": I challenge you to prove any of the three
forms of EMH. They have not been proved. That is why it is still
called the Efficient Market Hypothesis.
I'm certain that EMH has applications, but they are limited. The
random walk structure is too simplistic to accurately model
price changes. Economists know this, but EMH is their way of
throwing up their arms in frustration at not having a better
quantitative model. If EMH is true, then why do all of the
investment banks employ quantitative analysts? Do you think
they sit around and calculate weightings for stocks in the
S&P 500 index? Or plug numbers into a Black-Scholes spreadsheet?
As Doyne Farmer, et al have observed, short-run market price changes
exhibit the properties of a high-order differential system. This
is not to say that price changes may be easily predicted. On the contrary.
Technical analysis is limited in its scope as well. The reason
that economists regard it as disreputable has more to do with the
current vogue status that econometrics enjoys, than with any failure
of TA methodology. The more qualitative position taken by economists
such as Charles Kindleberger, who wrote brilliantly on the effect of
emotional excesses on markets, is viewed as being hopelessly out
-of-date. After all, if an emotion can't be quantified, then we
can't determine a correlation! Therefore, correlation = 0.
There are obviously some traders who perform better than others in
the long run, even though they have no greater amount of information.
This may be due to a superior ability to recognize patterns and
synthesize ideas quickly... but, this would fly in the face of EMH.
The weak form of EMH states that profiting solely from price patterns
is impossible, since they will be universally exploited.
Even Robert Malkiel is in the hedge fund business now. Do you think
his firm just dumps the partners' money into an index fund?
Myron Sholes' hypothesis (that the spreads between the US long bond
other global debt would narrow this last summer and thereby "revert
to the mean") turned out to be a disastrous gamble. Hmmm... once
again, we see those pesky, irrelevant emotions encroaching on our
pristine theories.
That should mean something.
AA |
