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Market Efficiency and Crises: Don’t Throw the Baby out with the Bathwater

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  • Ariane Szafarz

Abstract

The essence of market efficiency is fair asset pricing, which is compatible with multiple price dynamics and speculative bubbles. However, many practitioners and financial academics criticize the efficient market hypothesis on the basis of highly volatile asset prices. I argue that the persisting confusion as to the nature of market efficiency is driven by the difficulty to grasp the financial interpretation of multiple solutions. Importantly, the confusion can mislead regulators when addressing volatility containment. Acknowledging the multiplicity of efficient price dynamics not only enriches the understanding of financial crises, but also helps designing appropriate regulations.

Suggested Citation

  • Ariane Szafarz, 2015. "Market Efficiency and Crises: Don’t Throw the Baby out with the Bathwater," Working Papers CEB 15-036, ULB -- Universite Libre de Bruxelles.
  • Handle: RePEc:sol:wpaper:2013/217756
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    More about this item

    Keywords

    efficient markets; multiple solutions; rational expectations; speculative bubbles; volatility;

    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
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • B41 - Schools of Economic Thought and Methodology - - Economic Methodology - - - Economic Methodology

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