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Financial Market Efficiency Should be Gauged in Relative Rather than Absolute Terms

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  • Da Silva, Sergio

Abstract

Economists assess the efficiency of financial markets in absolute, all-or-nothing terms. However, this is at odds with a no-nonsense physics approach. Here, I describe how the relative efficiency of markets can be gauged taking advantage of algorithmic complexity theory. This is not physics-envy because the approach is superior in considering the proper randomness present in complex financial markets.

Suggested Citation

  • Da Silva, Sergio, 2015. "Financial Market Efficiency Should be Gauged in Relative Rather than Absolute Terms," MPRA Paper 64497, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:64497
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    File URL: https://mpra.ub.uni-muenchen.de/64497/1/MPRA_paper_64497.pdf
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    References listed on IDEAS

    as
    1. Meredith Beechey & David Gruen & James Vickery, 2000. "The Efficient Market Hypothesis: A Survey," RBA Research Discussion Papers rdp2000-01, Reserve Bank of Australia.
    2. Sergio Da Silva & Roberto Meurer & Caio Guttler, 2008. "Is the Brazilian stockmarket efficient?," Economics Bulletin, AccessEcon, vol. 7(1), pages 1-16.
    3. Giglio, Ricardo & Matsushita, Raul & Figueiredo, Annibal & Gleria, Iram & Da Silva, Sergio, 2008. "Algorithmic complexity theory and the relative efficiency of financial markets," MPRA Paper 8704, University Library of Munich, Germany.
    4. repec:ebl:ecbull:v:7:y:2008:i:1:p:1-16 is not listed on IDEAS
    5. Giglio, Ricardo & Da Silva, Sergio, 2009. "Ranking the stocks listed on Bovespa according to their relative efficiency," MPRA Paper 22720, University Library of Munich, Germany.
    6. Cleiton Taufemback & Ricardo Giglio & Sergio Da Silva, 2011. "Algorithmic complexity theory detects decreases in the relative efficiency of stock markets in the aftermath of the 2008 financial crisis," Economics Bulletin, AccessEcon, vol. 31(2), pages 1631-1647.
    7. repec:ebl:ecbull:v:7:y:2008:i:6:p:1-12 is not listed on IDEAS
    8. Giglio, Ricardo & Matsushita, Raul & Figueiredo, Annibal & Gleria, Iram & Da Silva, Sergio, 2008. "Algorithmic complexity theory and the relative efficiency of financial markets - Updated," MPRA Paper 11150, University Library of Munich, Germany.
    9. Sergio Da Silva & Raul Matsushita & Ricardo Giglio, 2008. "The relative efficiency of stockmarkets," Economics Bulletin, AccessEcon, vol. 7(6), pages 1-12.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Algorithmic complexity theory; Efficient market hypothesis; Financial market efficiency; Relative market efficiency; Mild type I randomness; Wild type II randomness;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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