Indispensable Definitions in Economics

I've studied now Philosophy And Jurisprudence, Medicine, And even, alas! Economy All through and through with ardour keen! Here now I stand, poor fool, and see I'm just as wise as formerly. Am called a Master, even Doctor too, And now I've nearly ten years through Pulled my students by their noses to and fro And up and down, across, about, And see there's nothing we can know! Goethe: Faust

Tuesday, March 30, 2010

Efficient Market Hypothesis

When is a market efficient? According to some, it is efficient if a person without insider knowledge is unable to predict future prices: future market prices follow a random walk. Most people believe financial markets are reasonably efficient in this sense. Unfortunately, efficient markets were also defined differently. A whole lot of economists claimed that financial markets priced assets “correctly”. They were supposed to reflect long run fundamentals such as future earning power. The dot-com-bubble wasn’t enough to explode this myth. Will the current financial crisis persuade analysts that asset prices follow a random walk: the pattern of the drunk on the way home?
Posted by at 6:32 AM

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