Are markets efficient?
Citation (APA): fama, e. (2016). Are markets efficient? [Kindle Android version]. Retrieved from Amazon.com
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Are markets efficient? By eugene fama
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What is the efficient-markets hypothesis and how good a working model is it? Fama: It’s a very simple statement: prices reflect all available information.
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Thaler: I like to distinguish two aspects of it. One is whether you can beat the market. The other is whether prices are correct.
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FORTE E DEBOLE
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Fama: It’s a model, so it’s not completely true. No models are completely true. They are approximations to the world. The question is: “For what purposes are they good approximations?” As far as I’m concerned, they’re good approximations for almost every purpose.
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Richard Thaler, you give the example of the 1987 crash, when stock prices fell 25 percent, as an example of how prices can be wrong in some sense.
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I don’t think anyone thinks that the value of the world economy fell 25 percent that day. Nothing happened. It’s not a day when World War III was declared.
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NESSUNA NOYIXIA IL GIORNI DRL CROLLO
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Fama: It was a time when people were talking about perhaps an oncoming recession, which turned out not to have happened. In hindsight, that was a big mistake; but in hindsight, every price is wrong.
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Robert Shiller. His argument was, “Prices fluctuate too much to be explained by a rational process.”
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Fama: Shiller’s model was based on the proposition that there is no variation through time in expected returns. But we know there is variation in expected returns. Risk aversion moves dramatically through time. It’s very high during bad periods
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DIFETTI DI SHILLER
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Do bubbles exist? How do we define bubbles? Thaler: I have two examples. The first is house prices.
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ES DI BOLLA
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Fama: What’s the bubble? The up? The down? The subsequent up?
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Fama: That’s an anecdote. There’s a difference between anecdotes and evidence, right? I don’t deny that there exist anecdotes where there are problems. For bubbles, I want a systematic way of identifying them.
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All the tests people have done trying to do that don’t work.
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The point is not that markets are efficient. They’re not. It’s just a model. The question is, “How inefficient are they?” I tend to give more weight to systematic things like failure to adjust completely to earnings announcements, or momentum, than to anecdotes, which are curiosity items rather than evidence.
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Whereas I think the rational thing to do, because prices reflect available information pretty much, is to be a passive investor.