I was wondering what the consensus here was about market efficiency. I am guessing most people here believe the markets are semi-strong form efficient. Will there be any more technical traders in 10-15 years, is this a dying philosophy? Also is there any way one could believe both black sholes and think the markets are inefficient? Seeing how blacksholes bases stock price movement on random motion with positive drift?

I'd opine that the debate about degrees of market efficiency is moribund and best left to right-of-centre academics who have little understanding about the real world but seem to think it very important to defend the Western way of life regardless of the facts. There, got that off my chest! Regarding your more interesting (to me) Black Scholes question, isn't the more important question what the majority of market participants believe, rather than what you believe? I'm thinking here of Keynes' idea of the "beauty contest".

QuoteOriginally posted by: GeneralDude is there any way one could believe both black sholes and think the markets are inefficient? Seeing how blacksholes bases stock price movement on random motion with positive drift?The markov property of the stock price in BSM implies a (weak) form of market efficiency,since the next price move does not depend on the whole previous path, but only on the lastobserved price.But suppose the markets where really all driven by a pseudo-random number generator and you had the code... :-)Cheers, Florian

if markets were efficient, hedge funds would have much less money to manage...however one cannot go very far in financial theory with the assumption that markets are inefficientno practitioner believes in Black-Scholes: it is a language rather than a predictive theory (read the last column in Risk by Emanuel Derman)e.

hi,can't start new threads dunno what is the requirement, but here I go-moderator please move to new thread if possible? Can a test for market efficiency be that any random collection of 40 stocks gives the same returns? e.g. we can choose 40 stocks from the 500 SPY stocks, and if the returns are all the same-over a period of 3 years say-then we can say that stock picking is useless. I choose 40 as an arbitrary number, could be 30, or 20, or 60. Can anyone point me to research on this if someone already look at stock market data this way?ThanksSanjay

QuoteOriginally posted by: sangandhihi,can't start new threads dunno what is the requirement, but here I go-moderator please move to new thread if possible? Can a test for market efficiency be that any random collection of 40 stocks gives the same returns? e.g. we can choose 40 stocks from the 500 SPY stocks, and if the returns are all the same-over a period of 3 years say-then we can say that stock picking is useless. I choose 40 as an arbitrary number, could be 30, or 20, or 60. Can anyone point me to research on this if someone already look at stock market data this way?ThanksSanjayNo you can't.Remember that the price of a stock is just the net value of the future cash flows, so if one stock has higher return than other, that just means that information about the future cashflows of that asset has arrived in the market, and consequently the prices is adjusted. See, you cant test markt efficiency by just saying that the returns should be equal in average. That doesnt make much sense.The classic way of testing market efficiency is to try some quantitative trading rules at the data. There are many ways of doing so. Check www.ssrn.com, you'll find plenty of papers on the subject. Some of them are very simple (e.g moving averages), others not so much (e.g. markov switching models).Another way is to define a "fair value" of the price and check if the difference at the data from such fair value is significant. But, as you probably should know, defining such "fair value" is kind of tricky and can be easilly challenged. I've seen this type of research with corporate finance, by checking the value of the stocks when they have splits.

Market efficiency tests whether a particular set of information is impounded into the stock price. The form of market efficiency would depend on what that information set contains, i.e. past information (weak), public information (semi-strong), and public/private information (strong). Countless tests of market efficiency under different forms have been done using all sorts of data. The evidence seems to be consistent with weak form and semi-strong form (in some countries). Any Google search on market efficiency will yield a lot of hits. Among other things, trading rule tests are for weak form efficiency whereas event studies are for semi-strong form.

QuoteOriginally posted by: sangandhihi,can't start new threads dunno what is the requirement, but here I go-moderator please move to new thread if possible? Can a test for market efficiency be that any random collection of 40 stocks gives the same returns? e.g. we can choose 40 stocks from the 500 SPY stocks, and if the returns are all the same-over a period of 3 years say-then we can say that stock picking is useless. I choose 40 as an arbitrary number, could be 30, or 20, or 60. Can anyone point me to research on this if someone already look at stock market data this way?ThanksSanjayperlin is correct in his analysis of why this method wouldnt work. However another reason, Assuming the CAPM pricing model, different stocks will give different returns based on their risk. One very strong study for semi-strong efficency took a look at abnormal returns of a stock at a period of time after unexpected news was announced. It found that a stock would not exibit abnormal returns after this new information came out.Really I am fascinated by this concept, as there are people dedicating their life to trading on concepts that could be thought of as completley useless. They could simply be somewhere on the right side of a normal distribution graph of career returns.I was talking to a trader today, not sure how good of one he was. I asked him about this, and what he thought. He said no one actually believed this anymore, and that it was almost virtually excepted that markets are efficient. But it seems like the real guys that are making money are arbitraging, and dont look at p/e ratios, or search for "technical patterns". What is the impression on wall st about this. Are they as dissmissive as this trader?

My analysis of past information informs me that the global markets are dramatically inefficient.Investors strongly express a preference for not only for the variance of the return, but also the regularity. Each of which concepts is orthogonal to the other, from which the concept of complex finance is born.

I'll put myself down as Semi-Strong. Empirical research suggests that Strong EMH is false, and I'm not sure what structural or causal reason one might have for believing it. It isn't hard to believe that the market is at least weakly efficient, with so many people and machines looking desperately for patterns in price series.