Tuesday, July 28, 2009

The future state of EMH

In a related article the Economist also discusses the state of efficient markets hypothesis. My view is that EMH is "usually" right - there are forces that push prices to its fundamental value. While behavioral economists have been trying to knock down the pillar of EMH, it would be fair to say that a convergence of views has now been accepted.

If there is any progress to be made it is in the transition of (asset) prices from its non-fundamental value to its fundamental values: How long does it take and why does the length of time vary? When asset prices do not represent fundamental values (bubbles) how can we know it? What policy responses are there to force the prices back to its fundamental value (before an ever growing bubble pops)?

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