IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

How Did Financial-Crisis-Based Criticisms of Market Efficiency Get It So Wrong?

Author Info

  • Ariane Szafarz

Abstract

In the aftermath of the financial crisis, market efficiency is being heavily criticized. However, the volatility-based criticisms rely on false grounds as efficiency and speculative bubbles are compatible. Indeed, the efficient market model is about rationality and information, not about stability. This model admits multiple solutions, as do most rational expectations models. One solution is the so-called fundamental one while the others are referred to as rational bubbles. Still, many practitioners, and even some financial academics, keep denying that speculative bubbles are compatible with efficient markets. This paper argues that not only would the recognition of efficient market multiplicity thwart irrationality-based theories, but it would also allow for further empirical developments taking full advantage of the power of diversity. The multiple price dynamics compatible with market efficiency represent a valuable asset largely underestimated by the profession.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: https://dipot.ulb.ac.be/dspace/bitstream/2013/53992/1/RePEc_sol_wpaper_09-048.pdf
Download Restriction: no

Paper provided by ULB -- Universite Libre de Bruxelles in its series Working Papers CEB with number 09-048.RS.

as
in new window

Length: 18 p.
Date of creation: 2009
Date of revision:
Publication status: Published by:
Handle: RePEc:sol:wpaper:09-048
Contact details of provider: Postal: CP114/03, 42 avenue F.D. Roosevelt, 1050 Bruxelles
Phone: +32 (0)2 650.48.64
Fax: +32 (0)2 650.41.88
Web page: http://difusion.ulb.ac.beEmail:


More information through EDIRC

Keywords: Efficient Markets; Multiple Solutions; Rational Expectations; Speculative Bubbles; Volatility.;

Other versions of this item:

Find related papers by JEL classification:
  • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

This paper has been announced in the following NEP Reports:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Guesnerie, Roger, 1993. "Theoretical tests of the rational expectations hypothesis in economic dynamical models," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 847-864.
  2. Flood, Robert P & Garber, Peter M, 1980. "Market Fundamentals versus Price-Level Bubbles: The First Tests," Journal of Political Economy, University of Chicago Press, vol. 88(4), pages 745-70, August.
  3. West, Kenneth D, 1988. " Bubbles, Fads and Stock Price Volatility Tests: A Partial Evaluation," Journal of Finance, American Finance Association, vol. 43(3), pages 639-56, July.
  4. Cochrane, John H., 1991. "Volatility tests and efficient markets : A review essay," Journal of Monetary Economics, Elsevier, vol. 27(3), pages 463-485, June.
  5. Bray, Margaret M & Savin, Nathan E, 1986. "Rational Expectations Equilibria, Learning, and Model Specification," Econometrica, Econometric Society, vol. 54(5), pages 1129-60, September.
  6. Refet S. Gürkaynak, 2008. "Econometric Tests Of Asset Price Bubbles: Taking Stock ," Journal of Economic Surveys, Wiley Blackwell, vol. 22(1), pages 166-186, 02.
  7. Broze, L. & Gourieroux, C. & Szafarz, A., . "Solutions of multivariate rational expectations models," CORE Discussion Papers RP -1161, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Evans, George W. & Honkapohja, Seppo, 2003. "Expectational stability of stationary sunspot equilibria in a forward-looking linear model," Journal of Economic Dynamics and Control, Elsevier, vol. 28(1), pages 171-181, October.
  9. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June.
  10. Michel, Philippe, 1990. "Some Clarifications on the Transversality Condition," Econometrica, Econometric Society, vol. 58(3), pages 705-23, May.
  11. Eugene F. Fama, . "Market Efficiency, Long-term Returns, and Behavioral Finance," CRSP working papers 340, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  12. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272.
  13. Pesaran, M. H., 1981. "Identification of rational expectations models," Journal of Econometrics, Elsevier, vol. 16(3), pages 375-398, August.
  14. Onatski, Alexei, 2006. "Winding number criterion for existence and uniqueness of equilibrium in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 30(2), pages 323-345, February.
  15. Adam, M C & Szafarz, A, 1992. "Speculative Bubbles and Financial Markets," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 626-40, October.
  16. Broze, Laurence & Gourieroux Christian & Szafarz A, 1984. "Solutions of dynamic linear rational expectations models," CEPREMAP Working Papers (Couverture Orange) 8421, CEPREMAP.
  17. Taylor, John B, 1977. "Conditions for Unique Solutions in Stochastic Macroeconomic Models with Rational Expectations," Econometrica, Econometric Society, vol. 45(6), pages 1377-85, September.
  18. Robert J. Shiller, 2002. "From Efficient Market Theory to Behavioral Finance," Cowles Foundation Discussion Papers 1385, Cowles Foundation for Research in Economics, Yale University.
  19. Flood, Robert P & Hodrick, Robert J, 1990. "On Testing for Speculative Bubbles," Journal of Economic Perspectives, American Economic Association, vol. 4(2), pages 85-101, Spring.
  20. Farmer, Roger E A, 1991. "The Lucas Critique, Policy Invariance and Multiple Equilibria," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 321-32, April.
  21. Stephen F. Le Roy, 2004. "Rational Exuberance," Journal of Economic Literature, American Economic Association, vol. 42(3), pages 783-804, September.
  22. Sargent, Thomas J, 1978. "Estimation of Dynamic Labor Demand Schedules under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1009-44, December.
  23. Evans, George, 1985. "Expectational Stability and the Multiple Equilibria Problem in Linear Rational Expectations Models," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1217-33, November.
  24. Broze, L. & Gourieroux, C. & Szafarz, A., 1985. "Solutions of Linear Rational Expectations Models," Econometric Theory, Cambridge University Press, vol. 1(03), pages 341-368, December.
  25. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  26. Bennett McCallum, . "Multiple-Solution Indeterminacies in Monetary Policy Analysis," GSIA Working Papers 2003-E77, Carnegie Mellon University, Tepper School of Business.
  27. Taylor, Mark P, 1990. "The Hyperinflation Model of Money Demand Revisited," CEPR Discussion Papers 473, C.E.P.R. Discussion Papers.
  28. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  29. Laurence Broze & Ariane Szafarz, 1991. "The Econometric Analysis of Non-Uniqueness in Rational Expectations Models," ULB Institutional Repository 2013/649, ULB -- Universite Libre de Bruxelles.
  30. Fourgeaud Claude & Gourieroux Christian & Pradel J, 1984. "Learning procedure and convergence to rationality," CEPREMAP Working Papers (Couverture Orange) 8411, CEPREMAP.
  31. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  32. Gary Anderson, 2008. "Solving Linear Rational Expectations Models: A Horse Race," Computational Economics, Society for Computational Economics, vol. 31(2), pages 95-113, March.
  33. Bennett T. McCallum, . "Role of the minimal state variable criterion in rational expectations models," GSIA Working Papers 1999-13, Carnegie Mellon University, Tepper School of Business.
  34. Broze, L. & Szafarz, A., 1984. "On linear models with rational expectations which admit a unique solution," European Economic Review, Elsevier, vol. 24(1), pages 103-111.
  35. Roll, Richard, 2002. "Rational infinitely lived asset prices must be non-stationary," Journal of Banking & Finance, Elsevier, vol. 26(6), pages 1093-1097, June.
  36. Bennett T. McCallum, 1981. "On Non-Uniqueness in Rational Expectations Models: An Attempt at Perspective," NBER Working Papers 0684, National Bureau of Economic Research, Inc.
  37. Burton G. Malkiel, 2003. "Passive Investment Strategies and Efficient Markets," European Financial Management, European Financial Management Association, vol. 9(1), pages 1-10.
  38. Jensen, Michael C., 1978. "Some anomalous evidence regarding market efficiency," Journal of Financial Economics, Elsevier, vol. 6(2-3), pages 95-101.
  39. Michel, Philippe, 1982. "On the Transversality Condition in Infinite Horizon Optimal Problems," Econometrica, Econometric Society, vol. 50(4), pages 975-85, July.
  40. Bray, Margaret, 1982. "Learning, estimation, and the stability of rational expectations," Journal of Economic Theory, Elsevier, vol. 26(2), pages 318-339, April.
  41. Taylor, John B, 1979. "Estimation and Control of a Macroeconomic Model with Rational Expectations," Econometrica, Econometric Society, vol. 47(5), pages 1267-86, September.
  42. Sims, Christopher A, 2002. "Solving Linear Rational Expectations Models," Computational Economics, Society for Computational Economics, vol. 20(1-2), pages 1-20, October.
  43. Blanchard, Olivier Jean, 1979. "Speculative bubbles, crashes and rational expectations," Economics Letters, Elsevier, vol. 3(4), pages 387-389.
  44. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
  45. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  46. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
Full references (including those not matched with items on IDEAS)

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.

as in new window


Cited by:

  1. Costa Cabral, Nazare, 2010. "Breve guia temático e bibliográfico sobre o estudo da actual crise financeira e económica
    [Short thematic guide to the study of current financial and economic crisis]    ," MPRA Paper 20743, University Library of Munich, Germany.

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Access and download statistics

When requesting a correction, please mention this item's handle: RePEc:sol:wpaper:09-048. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Benoit Pauwels)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.