Questions tagged [efficient-markets]

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Does the discounted dividend model assume a stock underperforms the risk-free rate?

I'm trying to understand intuitively why the stock market as a whole has outperforms the risk-free rate over time. I started by looking at the discounted dividend model which is one of the few things ...
yyy's user avatar
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Why do accumulating ETFs grow linearly instead of exponentially?

I am learning about investments and I often read that accumulating ETFs re-invest the dividends by buying more stocks of the underling assets. The advantage of this is that by doing so they take ...
Federico Gentile's user avatar
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How could a market be designed to prevent hoarding?

Imagine that someone has been put in charge of creating a new market for some kind of commodity. They have ultimate regulatory power. What kind of market mechanisms could they put in place to ...
Crashworks's user avatar
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Finding the market portfolio in a two-asset market under CAPM

I'm working on an unassessed course problem, Consider a market with risk-free return $5\%$ and two risky investment $A$ and $B$. We are given the following data: \begin{matrix} \text{Investment} &...
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Why does The Price of Anarchy have a lower bound of 1 (and a question about free market economics study)?

The price of anarchy is a ratio between the efficiency of a centralized solution and a solution with decentralized decision makers. The implicit assumption seems to be that the centralized solution ...
user10478's user avatar
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What is the difference between economic rent and economic profit?

I've been having a hard time understanding the distinction between economic rent and economic profit. As far as I understand it, the terms mean as follows: Economic rent is any revenue received by ...
Mark Morales II's user avatar
1 vote
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372 views

Relation between capm and efficient market hypothesis

I am coming from a machine learning/time series forecasting background and are currently studying Asset Pricing. I have a good understanding of what Markowitz Mean-Variance Optimization (MVO) does, ...
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Why do stock returns seem to be uncorrelated with interest rate?

Since expected return of stock is risk-free rate plus risk premium, intuitively they should be correlated. Of course the size of risk premium is not constant, but it's hard to imagine why risk premium ...
ssamtkwon's user avatar
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Definition of "true price" of an asset and connection with efficient market

A paragraph from the article Asset Mispricing: One of the central doctrines of modern financial theory is that the price of a security should equal the present value of its cash flows. Recently, ...
Sane's user avatar
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Efficiency in the market

What’s the difference between market efficiency (as in efficient market hypothesis) and allocative efficiency? Do they mean the same? or are they connected?
Kmd's user avatar
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Market makers outside of exchanges

I found this picture on SEC of how brokers will handle their customer's orders. Why are there market maker out side of exchange? Isn’t it dealers or wholesalers that’s not approved by exchanges as a ...
Kmd's user avatar
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Have there been any studies exploring whether Wikipedia editing/volunteering is Pareto efficient?

Wikipedia has often been jokingly described as an idea that "could never work in theory – only in practice." The fact that Wikipedia seemingly aggregates information so well through ...
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Do non-market gift economies tend towards Pareto optimality?

A gift economy is a system of exchange characterised by delayed exchange on the basis of the principle of reciprocity. I.e. where a market seeks to exchange goods in immediate transactions without ...
Vlad's user avatar
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Are there any economic reasons why luxury goods should not be auctioned off, or at least dynamically priced, when facing shortages?

Over the last year many prominent examples come to mind, where there does not seem to be any limiting moral or ethical reasons, and are simply not available most of the time due to demand greatly ...
M. Y. Zuo's user avatar
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2 answers
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How to weakly predict T-bill rates?

I know, I know -- if I could predict Treasuries, I could leverage that information, various forms of the EMH, etc. But a lot of people have mortgages (ARMs) tied to US1Y, and so having some kind of ...
Charles's user avatar
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Evidence for or against the Efficient Market Hypothesis in financial markets and the currently dominant view

The Efficient Market Hypothesis seems to draw quite a lot of attention in popular debates, and in general during discussions on Behavioral Finance, where it is often seen as not entirely correct. I ...
Ishan Kashyap Hazarika's user avatar
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Market efficiency given asymmetric characteristics of securities markets

In an ideal market buyers and sellers in aggregate incorporate all available information and, as a result, the market price of an asset reflects its fair value. But in real securities markets there is ...
feetwet's user avatar
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How elastic are markets with regards to unethical companies? [closed]

Do markets respond by naturally boycotting unethical companies? For example, if an American company makes its products using Uyghur labor, can we trust their customers and would-be customers to ...
PineappleThursday's user avatar
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2 answers
1k views

How do EMH proponents explain Black Monday (1987)?

On Black Monday (19 Oct 1987), the Dow Jones Industrial Average fell by 22.6%. How do proponents of the Efficient Markets Hypothesis (EMH) explain this event? Do they actually claim that the intrinsic ...
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3 votes
1 answer
145 views

Pareto efficiency of organ markets

Organ sale is legal in Iran. I was wondering: are organ markets Pareto efficient? Or could an argument be made for them being Pareto efficient? I have been thinking that both the buyer and the seller ...
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Efficient market hypothesis and different performances between countries

When comparing historical gains (I used the "adjusted close" data on yahoo) of major indices in different countries it is clear that the US outperformed most of these by quite a bit (see for ...
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Why do different product-markets record different rates of return if the assumption of competitive markets hold?

I'm a new economics student, and have become fascinated by the field of Industrial Organization. To that end, I'm reading through the Carlton and Perloff Modern Industrial Organization text book. In ...
new_but_trying_to_learn's user avatar
1 vote
1 answer
174 views

Premises on which the Efficient Market Hypothesis is built upon

The Efficient Market Hypothesis tells us that stocks are "fairly priced" (i.e. not systematically over- or under-valued). That is, stock prices reflect all information that is already known about them....
Tan Yong Boon's user avatar
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1 answer
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Does ownership determine efficiency in an economic system?

what determines efficiency in an economic system? a) ownership b) competition c)both d) none I am confused between option (C) and option (B) because I am not sure about whether ownership can be said ...
Varun Singh's user avatar
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Optimizing Lagrangian Function Subject to 4 Input/Output Constraints:

The objective function: $$\text{utility}=U\left(x_{c}, y_{c}\right)$$ subject to, $x_{o}=f\left(y_{i}\right)$ $y_{o}=g\left(x_{i}, x_{o}\right)$ $x_{c}+x_{i}=x_{o}+x^{*}$ $y_{c}+y_{i}=y_{o}+y^{*}$ ...
aisync's user avatar
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Model of economic cycles consistent with efficient market hypothesis

I do not have background in economics, so my question may be naive or I might have taken incorrect assumptions somewhere. As far as I understand, efficient market hypothesis applies, saying that the ...
Irigi's user avatar
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2 answers
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EMH: Difference between market price and fundamental value?

I am confused by the relation between stocks market prices and fundamental (or intrinsic) values stated by Efficient Market Hypothesis. How these deviates regarding to efficient market theory or are ...
Lothilla's user avatar
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30 views

A problem: allocation of apartments

Setup: Trine owns an apartment in Copenhagen. She is willing to rent it out at any positive price. Peter and Simon lives together and are both students. They will like to rent the apartment for less ...
Xenusi's user avatar
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Why hipothesis of perfect competition market implies fixed price of a product in every transaction?

My book says that from the axioms of perfect competition follows that the price is fixed in every transaction but it doesn't specify in which way it is possible to prove it. Besides, are all the ...
Tortar's user avatar
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3 votes
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Doesn't the semi-strong form of the EMH conflict with expecting stock indices to increase in the long run?

I willfully don't define "long run", as I'm certain you economists can do this better! Please edify me on a reasonable number, and I can edit this post. I quote Malkiel's definition of &...
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1 vote
1 answer
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How exactly does removing labor​ market rigidities reduce structural unemployment and increase potential output in an economy?

Here I want to focus primarily on the potential benefits of labor market reforms such as a reduction in job security and trade union power and not their controversies. I wish to learn a few thoroughly ...
LHC2012's user avatar
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Does the Efficient Market Hypothesis Solve the Tragedy of the Commons?

My layman understanding of the Efficient Market Hypothesis is that there is so much brain power focused on the maximization of profit in the marketplace, that the market will find the best solution ...
Krastanov's user avatar
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-1 votes
1 answer
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How does "Survival of the Fittest" result in Rosetta Stone's economic success?

I would briefly comment that Rosetta Stone has a terrible reputation among language lovers (see sample review about why most people can't learn like they did as a child), and some language lovers ...
Christos Hayward's user avatar
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2 answers
50 views

How can markets can be highly efficient, even if they make errors?

A Random Walk Down Wall Street (2015 11 ed, but an 2019 ed. is upcoming). p. 105 Middle.   $\color{red}{\text{Markets can be highly efficient even if they make errors.}}$ Some are doozies, as when ...
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1 answer
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Is there an economic theory that explains what happens when a market is saturated with a precious resource?

The theoretical situation is this. What if a record breaking amount of platinum were discovered. What would happen to the economies that use, store, and/or produce platinum? I would like to apply ...
Arphaxad's user avatar
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1 answer
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Do the efficiency savings of mergers indicate a type of waste or inefficiency in a market?

In this BBC News article about the merger of Tata Steel and Thyssenkrupp, the following figure is reported: The merged group anticipates it will make costs savings of between £350m to £440m a year. ...
jl6's user avatar
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5 votes
1 answer
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Auction mechanism with no trusted third-party

I have been using a double-auction mechanism to solve a two-sided market where multiple agents are competing to supply/use slices of a shared resource. The owner of the resource is a trustable third-...
Nima Afraz's user avatar
3 votes
0 answers
77 views

Market efficiency in software, music, news, etc

I'm not an ecomonist, but have been tossing around some ideas in my head for a long time and thought I might ask here what resources or existing work might be out there. There are a lot of market ...
user149485's user avatar
6 votes
3 answers
2k views

What is the exact relationship between the efficient-market and random-walk hypotheses?

The efficient-market and random-walk hypotheses are often discussed together as formalizations of the idea that "you can't consistently beat the stock market". But in my experience, they're often used ...
tparker's user avatar
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1 answer
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Is the convexity of production sets necessary for the welfare theorems?

I have read that the convexity of production sets (for instance non-increasing returns to scale) is not a necessary assumption for the first welfare theorem but it is for the second welfare theorem. ...
Fusscreme's user avatar
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5 votes
0 answers
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Letting clients/guest reserve their space vs keeping space clear so that it is available for people who really need it at the moment

Everybody knows that moment when you are in search for a beach lounger but everything is covered by towels, yet the people who placed them there are untraceable, often back at the hotel or in the town ...
Johannes Ebster's user avatar
3 votes
3 answers
411 views

Does my research prove market inefficiency?

The long story short, I have developed an index based on a certain distribution. Then I aligned NYSE stocks according to this index i.e. the stocks with the best fit are first and the worst are last. ...
Commissar Vasili Karlovic's user avatar
3 votes
2 answers
291 views

Adam Smith and wage gap?

Recently I was reading up on Adam Smith's economic philosophy of competition (i.e self interest) and division of labor. While I understand (and agree) with Smith's commentary that free markets and ...
jonplaca's user avatar
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6 votes
2 answers
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Is there a comprehensive list of all market failures ever discovered?

I'm looking for a complete run down of all different kinds of market failures; Wikipedia has a list but I'm not sure if there might some obscure kinds of market failures that Wikipedia is missing. ...
Lee Wang's user avatar
4 votes
3 answers
2k views

Is market failure the same allocative inefficiency?

From an IB Economics book (in the microeconomics section): The part in blue suggests market failure is the same as allocative inefficiency, but the part in red seems to suggest that market failure is ...
BCLC's user avatar
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2 votes
0 answers
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Demonstrating that markets yield productive and allocative efficiency to introductory students

Has anybody come across a nice, intuitive (i.e. neither formal nor technical) way to demonstrate how markets yield both productive and allocative efficiency? I suppose the allocative argument ...
Shane's user avatar
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1 answer
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Contract curve for firms with linear utility functions

I am attempting to find a contract curve for a production economy with two linear utility functions. Normally, I would find the point where the Marginal Rate of Technical Substitution were equal for ...
TheEconomist's user avatar
2 votes
2 answers
306 views

Does a perfectly price discriminating natural monopoly cause externalities or any type of market failure?

In perfect price discrimination, all mutually beneficial trades take place, the natural monopoly captures 100% of the surplus, and pareto efficiency is achieved. However, I've read various sources ...
B T's user avatar
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3 votes
2 answers
716 views

Under what conditions does market failure occur?

Edit: Is it possible to broadly categorize the ways in which market failures occur into relatively few categories? If so, what are they?
Ian Robertson's user avatar
1 vote
2 answers
542 views

Is trading in the commodity futures much more riskier than trading in stock market futures?

My understanding is that the price of a stock at the stock exchange is determined by supply demand mechanics during trading hours, and the price of futures is determined by the price of the underlying ...
Martin's user avatar
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