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

Ariane Szafarz

No 09-048.RS, Working Papers CEB from ULB -- Universite Libre de Bruxelles

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.

Keywords: Efficient Markets; Multiple Solutions; Rational Expectations; Speculative Bubbles; Volatility. (search for similar items in EconPapers)
JEL-codes: B41 G12 G14 (search for similar items in EconPapers)
Pages: 18 p.
Date: 2009
New Economics Papers: this item is included in nep-cfn and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Working Paper: How Did Financial-Crisis-Based Criticisms of Market Efficiency Get It So Wrong? (2010)
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