Comments on: The Not So Efficient Market (Theorem) Hypothesis

By: Dribble vs. Dumb Agent Theory : DumbAgent.com

Dribble vs. Dumb Agent Theory : DumbAgent.com — Tue, 22 Sep 2009 13:17:26 +0000

[...] recently came across a blog by Charles Davi, and more specifically an entry entitled The Not So Efficient Market (Theorem) Hypothesis. Here Davi gives a very mathematical argument against the Efficient Market Hypothesis. While we [...]

By: A higher order species « Entitled to an Opinion

A higher order species « Entitled to an Opinion — Wed, 13 May 2009 04:29:34 +0000

[...] same as saying they allocate capital efficiently. That’s the topic of Charles Davi’s The Not So Efficient Market (Theorem) Hypothesis. Possibly related posts: (automatically generated)Are Markets Efficient?Adaptive Market [...]

By: Mark To No Market Accounting « Derivative Dribble

Mark To No Market Accounting « Derivative Dribble — Tue, 18 Nov 2008 00:32:11 +0000

[...] the correlation of default between certain investments, creating a short term shortage of cash, leading to massive and collective sell offs across asset classes. That should sound familiar. Such a scenario would arguably create [...]

By: erdosfan

erdosfan — Sun, 26 Oct 2008 15:42:10 +0000

Hi Matt,

I never state that A intentionally “signals” anything, I simply state that the T’s are aware of her intent. Imagine that A is a bank which has publicly disclosed large exposure to sub prime MBS. The T’s know that eventually A must draw on its other liquid assets (e.g., ABC Stock) to meet obligations. So, A doesn’t signal, but the T’s are aware. Therefore everyone is maximizing expected utility.

By: Matt

Matt — Sat, 25 Oct 2008 18:31:33 +0000

I think your initial model is flawed you. You assume that each market participant is maximizing expected utility. However you then assume that A somehow signals to the T’s her intent to sell which is clearly not utility maximizing behavior. A would simply liquidate her position without notifying the others. I suppose your model would still work if the T’s rush to sell at the same time as A driving the price down. It does not seem plausible to me that A wants to sell but somehow the T’s can sell first.

By: erdosfan

erdosfan — Thu, 16 Oct 2008 16:20:30 +0000

To your last point: Yes, the reverse is also inefficient. It would push capital costs downward (and asset prices up) to an extent that exaggerates bona fide changes in economic conditions (e.g., the U.S. housing market).

By: erdosfan

erdosfan — Thu, 16 Oct 2008 16:17:38 +0000

To your first 4 points: I assume that the market was efficient in all respects before the sell off. This may or may not be true in reality. But it doesn’t matter. The point is, even assuming markets are efficient ex ante, liquidity problems can lead to inefficient results ex post.

By: all other things being equal

all other things being equal — Thu, 16 Oct 2008 02:54:30 +0000

Are cash and equivalents priced efficiently?

Is volatility priced efficiently?

Was the equity premium priced correctly?

Is debt efficiently priced?

Single firm, market, future firm.

Does the excercise seem as inefficient in the reverse case where equity is bid up?