Hoping that time zone differences will protect me from the revolutionary tribunal . . . like hell
Curtiss Leung wrote:
>>1. What counts as information? If I'm stock market
>>investor, I can make choices according to the
>>fundamentals of a stock or the so-called "technical"
>>analyses. Even if I grant that markets are efficient
>>in the sense its defenders give (and that the
>>definition they give isn't a tautology but has some
>>real meaning), that means the current stock prince at
>>any given time takes into account both of these models
>>of valuation. But these two models can yield
>>contradictory results, and from a contradiction,
>>anything follows. So it seems to me that the
>>defenders of the faith must either stipulate a single
>>correct method for valuing securities, or admit that
>>the amounts of "noise" in the information the market
>>processes can be so high that the legitimate price of
>>a security could be anything.
>As they say, efficient market theory has a dual hypothesis problem:
>the speed by which info is incorporated in prices, and the quality of
>that information. It's hard to argue against the first part - most
>markets react almost instantaneously to news. The second is another
>story - that's where irrationality and exuberance come in.
At this point a gripe about Reuters seems apropos -- I've been pissing and moaning about this all day, and nobody in the office will listen to me anymore. We get our news from the REuters newswire, who have complete ownership of my desktop newswire space -- they don't have to compete with anyone for my attention. But they still feel the need to use screaming, tabloid-style headlines, wasting everyone's time with complete bullshit. For example, at 1245 today, the wires were screaming in red ink "Commerzbank CEO says open to talks with Dresdner". Which might lead one to believe that a) Reuters had talked to the CEO, and b) that he'd said he was interested in a merger. The stock was up 4% as the trading desks went mad.
Then, *one hour* later, the story behind the headline was filled in. It turns out that the source was the press office of CoBa, and that he had replied to a question, saying "We are open to talks with all kinds of people, and would not exclude Dresdner Bank. THere are no talks at the moment" -- ie a standard fob-off. So in other words, the original headline was a complete screw-job. The stock was back down.
Then, three hours later, they run the same damn piece of crap AGAIN!!!, except that now it's a "features" piece, because they've appended a few paragraphs of comment from analysts telling them that their original story was bullshit!!!!! This is the information that moves markets, in the short term.
>>2. Obviously it takes time for information to
>>propagate and for people to make their trades, and I
>>suppose this lag accounts for temporary
>>"inefficiencies." But has any orthodox capitalist
>>theorist stipulated those times or conditions at which
>>the market has incorporated all the information and
>>the market price of a security has reached its correct
>>price? If any have, I suppose there's a good amount
>>of controversy about what those times and conditions
>>are, so at least they're trying. But if they
>>*haven't* -- well, what's the excuse?
>To a market fundamentalist, the latest price is the "correct" price,
>since it by definition incorporates all available information, and
>there's no omniscient observer who knows better.
There's a field of study on this called "market microstructure", which looks at the process of price formation. The best characterisation is that trading and price discovery is a Bayesian learning process, as each trader takes into account the latest piece of information and changes their bid and offer. Then the other players notice that someone's changed the price, and *that* is information to them, so they change their prices, and so on. The price at any one time is the price paid by the marginal investor.
Charles Dow argued that the "informative" price is the closing price, since that is the price at which large players are prepared to hold the stock overnight, financed by borrowed money.
cheers
dd
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