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Politics : Formerly About Advanced Micro Devices -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (215350)	1/18/2005 8:52:36 PM
From: neolib	Read Replies (1) \| Respond to of 1574005

Well, what we have learned over the last century is that market dynamics wring incredible efficiencies out of systems. It might not have escaped your notice that many of the latest decision-making ventures have been modeled after bid-ask models. There was even one proposal that involved creating a futures market for terrorism related possibilities, with the theory that information flows would become super-efficient, giving a fairly accurate forecast of future terrorism events. Now that wasn't politically correct, but it was a good idea. I even watched another futures market where one asset was the presidential race. You could estimate Bush or Kerry's chances of winning based on the price of the future, which fluctuated between $0 and $100. IMO, this is nonsense (apologies in advance if this offends :)) It is standard free market dogma however. The best way to consider this is to look at market valuations. The claim is that the free market is very good at setting a valuation, since it is in the interest of any participant to spot arbitrage situations, and profit from them. So, the instantaneous value assigned to a company (via the current share price) should be the best estimate of its true value. This estimate clearly must reflect the perceived future, as far as it is visible from the present. If we assume this is true, then we have a mathematical means of gauging just how good or poor the market based price is. Take the current share price (Sp), and superimpose a continuous compound interest exponential equation Sp = (Pe^Yr). Next pick any prior starting point (over the region which you wish to test the "efficiency" of the market). This gives you P, the starting share price and also Y the time differential. Next solve for r the effective rate (a historical fact for the period). We now have the data needed to compute what I will call the market efficiency value (MEV). Please note that all values are obtained from market set prices, so you cannot argue that I am somehow reaching outside the "efficient" market system to arbitrarily impose some (communistic <g>) parameter on you! MEV = (1/Y) x sqrt(integral of (Pe^Yr - Sp(Y))^2). In words, MEV = the normalized root mean square of the error between the market determined compound growth curve, and the market determined instantaneous share price. If the market where "super efficient" then the MEV would be 0. For all time periods. Please not that claiming that conditions might vary widely (and hence the share price) over the time interval of interest is simply an admission that the current share price at any instant in time is NOT an efficient present value of the shares. Please also not that the MEV is only of HISTORICAL use. It tells you how inefficient the market price was over the entire interval. It provides no help in setting a more efficient price now. This is the only sense in which markets are efficient. We have no known other means of being more efficient. So you can honestly say that markets are as efficient as we currently can conceive, but they might be very inefficient at best. The MEV is not without use however. It can be used to compare historical market efficiencies of different stocks. So it could be used as say a risk reduction tool when comparing stocks. It also could be used to determine if certain changes, most notably free information, might change the market efficiency.