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some math / market facts:
the word efficient applies to the notion of information processing ( info factoring ).
nature has plenty of random processes...
EMH:
data representation model and explicit market model are two different concepts.
you can find a representation model by matching financial data to your data generation process.
this does not mean that you found the explicit market model.
EMH only stands under the following conditions:
- ideal liquidity ( the most important ), market EQ assumption.
- symmetric information
- rational traders
- no manipulation
* lack of speculation on future information ( pure speculation ) is not a condition for EMH.
in real markets:
- liquidity which is the main market variable is not ideal, you have to hunt for liquidity especially if you are
a large trader. suppose a unit of new information is coming into the market which is quantified as a surprise
( surprise is a very important concept in info theory ) for the majority of participants including insiders, then it would take
some time to factor that information in especially for large traders...
prices will not reflect new value based on new information for some time... money can be made on the fact that info
factoring process takes time...
- there is no info symmetry in the markets, there are insiders, informed and uninformed traders, headline traders and
TA traders... it short markets are not symmetric relative to info. however in recent years faster info dissemination takes
less time, so it could be said that markets become somewhat more efficient in processing information. also order
processing systems got faster and executing orders, that increased efficiency too.
- not all traders are rational, some make irrational decisions when factoring information, one trader may interpret
new information as negative, another trader as positive. some will interpret it as already factored in, others as not
factored it yet... this can create bias in cumulative decision making process.
- manipulation is rampant in the markets, insiders ( dominant players ) routinely manipulate the public, because they have better
access
to information, have better access to liquidity, know how to manipulate liquidity and irrational and uninformed traders
- some traders speculate on future information and thus make irrational decisions, some only trade based on
current information
the bottom line is that markets can NEVER be efficient ( random ) by default, so EMH is pure hypothesis, wishful thinking
a utopian concept, where liquidity is 100%, markets factor in information instantaneously,
you can't get paid for correct info processing in the long haul because you are forced to speculate only on future
info, information is delivered to everybody on time fast, there is no manipulation, no risk aversion and profit predilection...
but markets can become more efficient or even less efficient, liquidity changes, information can be disseminated faster, order
matching algorithms improve or get worse, manipulation may be harder to accomplish in some markets with large liquidity.
finally, i think that randomness and efficiency are two different concepts and basing a theory on both of them ain't the right thing
to do.the other main argument in Random Walk Theory is that: 1. since we can not disprove that information arrival process
is not random( both exogenous and endogenous info ) then market movement must also be near random as a result,
2. ***thus markets must be near efficient...
1. concept maybe much closer to the truth, at least on some time frames, but that does not automatically mean that 2. is the
effect of the cause 1. even if info is near random, markets don't have to be efficient at processing that random info...
thus random information is not the condition for the efficient markets...
if you know what i mean. apples and oranges ( in my view ).
to answer the main question: Market Behavior: Random or not?
the market has an inherent degree of randomness, meaning markets are only partially random, not 100% and not 0% but
in between those numbers and that measure of randomness fluctuates ie at times the markets are more random, other times less.
in detail: market is more random towards the end of info factoring process and less random during the process itself
( similar to standard def. of entropy ).
bilo.
ps. an example of representation model is garch model that can generate fat tails, but it does not mean that garch or any other
data matching models are the explicit true models, they are just data representation models. same goes about brownian motion random
walk models. when the data generation process is not understood well the first thing you do is find the simplest data matching
model.
that's what happened with EMH and that's how the "random market" hype cliché was born.
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