Wednesday, October 28, 2009

Imperfect Financial Information

Most people, and commentators, do not understand what the efficient market hypothesis means. As I claimed in past posts on this blog, the big crash (especially in stock markets around the world) and the financial crisis (essentially a banking crisis) do not refute the hypothesis. As Jeremy J. Siegel (author of Stocks for the Long Run, McGraw Hill, now in its fourth edition) writes in the Wall Street Journal here , “neither the ratings agencies’ mistakes nor the overleveraging by financial firms was the fault of an academic hypothesis".

Market prices can reflect all the available information, and nevertheless change drastically from one period to another. We should not forget that information about the environment is constantly changing too.

So, after all, the market for information is imperfect indeed since most people who write in the field do not get the basics right.

Hat tip to Greg Mankiw.

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