"Are Markets Efficient?" asked the MD
A question that frequently came up a few years ago in my interviews was "Are markets efficient?" I'd usually answer, "Yes," weak form (data), semi-strong form (news) and most of the time "strong form". My classes/textbooks always said the market was efficient, even strong form (insider info).
What is the right answer to this question, especially in an interview. If I took a stance on markets being efficient at a buyside shop they would always follow up with "Then why do we exist!"
Now I think I'd answer the question this way. Tech traders are a joke. News based hedge funds sometimes can make it happen. If you walk the line and dig up legal inside info and you can profit. Somewhere in the middle falls the buyside mutual fund guys. They follow fundamental analysis where their projections differ from the market (Warren Buffet). In my job I see my companies make very profitable acquisitions independent of their synergies.
Conclusion: Public equity markets generally efficient, but there are some real deals in small cap PE and good old fashion fundamental analysis.
Someone correct me if I am
Someone correct me if I am wrong, but academically efficient markets is the party line, but industry wise you should say markets are inefficient or something along those lines.
Reality, they are probably semi strong efficient. Most of the markets are efficient most of the time.
MSF Website
MACC Website
MSF Twitter
Markets are extremely
Markets are extremely inefficient. Read some books by Buffett/Graham/Klarman and you will see that Beta and the EMT are an absolute joke.
Explain how Bear Stearns falls from $60/share to $2/share in two days...
Explain why the Dow fell 22% in a single day back in 1987. .....
Explain why Enron crashed in 2001
If the market was efficient, it would not have such wild gyrations. The most notable to me was the crash in the price of oil in 2008 from $145 to $29 !!!
"Mr. Market" is very irrational
practioneers will tell you
practioneers will tell you they would be out of their job, if markets weren't inefficient
At the micromarket level (the person to person level that makes markets generally efficient in long-term and broadly), practioneers will tell you they would be out of their job, if markets weren't inefficient.
Someone has to take advantage of arbitrage (at the micro level), and it is their actions that make overall markets efficient and especially over the long term.
Though without risk, arbitrage,exist in inefficient markets such as PE, HF, small cap, emerging and institution high capital investment.
Stay tuned, guys. I'm doing a
Stay tuned, guys. I'm doing a book review tomorrow that might blow you away. It did me.
Here's a preview:
The Quants: How a New Breed of Math Whizzes Conquered Wall Street and Nearly Destroyed It
Markets are inefficient.
Markets are inefficient.
--------------------------------------------------------
"I do not think there is any other quality so essential to success of any kind as the quality of perseverance. It overcom
This point is very much still
This point is very much still being debated. Efficiency is measured by the model which prices the market. To say the market is efficient/inefficient you first need to assume that your model is correct. New research are underway and the trend is that the current models are insufficient in pricing the market. Risks like liquidity, momentum (it could be a risk factor), price/dividend yield, SMB, HML can explain a lot of the gyration in the market. As you can see I'm in the rational/efficient camp.
Market participants say markets are inefficient. What they don't realize is that they are taking on risks. When you make a bid/ask you are taking on liquidity risk. When hedge fund trade on what they thought was alpha (riskless profit), they discover that they are also trading on liquidity risk (see the quant fund meltdown during the crisis). And don't forget what Stiglitz said, and I paraphrase: markets aren't inherently efficient, but market participants actually drive prices up and down to make it so. So what fundamental research really is is that it is your reward for making that effort.
How would this be for an
How would this be for an answer at a buy-side interview? "Markets are relatively efficient, because people like us are out there searching for asset prices that are inefficient." I truly do believe that, I'm not just trying to come up with a good answer. Markets are fairly efficient, that's why it's not easy to make money in the market. On the other hand though, there is plenty of room to find over/underpriced assets through hard work. The fact that so many professionals jobs are to find mispriced assets, is the reason markets are pretty (but not completely) efficient.
For my aspiring Entrepreneurial Nomads, check out my blog.
Markets are not efficient. It
Markets are not efficient. It reminds me of a story at a hedge fund where they ask their interns if they think markets are efficient. If they say yes - "well you shouldn't care if I fire you right now. You should be able to find an equivalent job immediately."
I don't know how to say it nicely but this is a pretty clear acid test for who is still in school. There is a fundamental difference between "goods"markets and "asset" markets - "goods" markets are much closer to efficient (but not fully) than "asset" markets and it's a huge mistake to conflate the two.
The cute little stories about the baker making X loaves of bread and the price goes up because of demand simply do not apply when you're dealing with modern financial markets.
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
For a market-making
For a market-making interview, I believe the classic gutsy response is, "Only when I'm making them efficient."
My view is that markets are relatively efficient, but they pay for services- services like making securities the right price, as well as liquidity. SOMEBODY has to make money by making sure these stocks reflect their intrinsic value and help get investors in and out of positions- why not you?
Work hard, play hard.
In theory, Yes. In reality,
In theory, Yes. In reality, Maybe Not and we cannot get prosperous to using the fact that it isn’t. Even an insider trading could not get benefit from the market. When the insider buy a share, other investor may follow their action. The stock may rise and the investor could not get higher return. But hell, who cares. As long as we have a job, it doesn’t matter. For interviews, I’d answer yes or no according to the firm.
TheBuySideGirl wrote: In
In theory, Yes. In reality, Maybe Not and we cannot get prosperous to using the fact that it isn’t. Even an insider trading could not get benefit from the market. When the insider buy a share, other investor may follow their action. The stock may rise and the investor could not get higher return. But hell, who cares. As long as we have a job, it doesn’t matter. For interviews, I’d answer yes or no according to the firm.
When the "insider buy a share, other investor may follow their action." - Yes this is what you WANT to happen. If you buy a share, you want others to buy it AFTER you so the price goes up. So you can then sell it. You know, buy low, sell high?
What firm would you say "yes there are efficient markets"??
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
In an interview setting, the
In an interview setting, the interviewer is not looking for the correct answer; they are looking at the way you think about the problem. The key is to able to speak intelligently about the subject. Make your point, support it with evidence, and they will be impressed. You have to realize that even the academics have trouble substantiating or refuting EMH... how much can an interviewer really know?
Since the financial meltdown
Since the financial meltdown Thaler and the behavioralists have been getting alot of traction. Human beings have shown they do not act rationally all the time.
I probably would not go Gene Fama on a buy side interviewer.
ideating wrote: When the
When the "insider buy a share, other investor may follow their action." - Yes this is what you WANT to happen. If you buy a share, you want others to buy it AFTER you so the price goes up. So you can then sell it. You know, buy low, sell high?
What firm would you say "yes there are efficient markets"??
Maybe I meant a bit further. The investor(insider) won't get higher returns as he'd expected in the first place as the price goes up while he builds up his position. And I could say yes at any interviews and get away with it as long as I make things clear and logical enough.
As long as there is
As long as there is information asymmetry, there cannot be perfectly efficient markets. And believe me, information is never symmetric.
TheBuySideGirl
adapt or die wrote: Since the
NYNY wrote: As long as there
For my aspiring Entrepreneurial Nomads, check out my blog.
In regards to whether or not
For my aspiring Entrepreneurial Nomads, check out my blog.
adapt or die wrote: Since the
The only interviews at which
Modeling Training
Finance Interviews Guide
Resume Review
swetom wrote: adapt or die
MArkets for publicly traded
the only correct answer to
adapt or die wrote: swetom
Monument Man wrote: the only
For my aspiring Entrepreneurial Nomads, check out my blog.
No way are markets
Totally unrelated, but the
Just wanted to answer a point
no, otherwise how do ppl make
BCbanker wrote: Just wanted
On the subject of "Are people
AnthonyD1982 wrote: Someone
CharlesWManuel
MSF Website
MACC Website
MSF Twitter
AnthonyD1982 wrote: Academics
For my aspiring Entrepreneurial Nomads, check out my blog.
It's real simple; you want
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
ideating wrote: It's real
MSF Website
MACC Website
MSF Twitter
AnthonyD1982 wrote: ideating
jnl83 wrote: AnthonyD1982
MSF Website
MACC Website
MSF Twitter
Market efficiency theory is
Oh really? This mentality?
Financial Modeling Training
Guide to Finance Interviews
Banking Resume
ideating wrote: Oh really?
I was under the impression
jnl83: "Efficient Markets" is
Hi rmivalue, please read
I don't see how the EMH holds
Jack: They’re all former investment bankers who were laid off from that economic crisis that Nancy Pelosi caused. They have zero real world skills, but God they work hard.
-30 Rock
jnl83 wrote: Hi rmivalue,