Comments on: Efficient Markets Confusion

By: michael webster

michael webster — Wed, 22 Jul 2009 20:36:06 +0000

Constant;

After the price for the bets are formed, it is possible to check the analysis of the model.

Prior to betting, to make money, you have to do a lot more than use the formula. You have to know what you are looking for at the tote board volume changes.

By: Douglas Knight

Douglas Knight — Wed, 22 Jul 2009 07:14:46 +0000

The “deep-pockets” isn’t about acquiring the info, but about moving the market. Maybe small players have lots of info not in the market, and make money off of it, but if they don’t move the market, they’re not relevant to the price. So the price doesn’t reflect that info (at least not very well), only the info available to big players.

People like to bridge the two worlds by saying that rational agents will become big players. But people have declining marginal utility with their own money and skewed preferences with other people’s money.

By: TGGP

TGGP — Wed, 22 Jul 2009 03:36:51 +0000

Charles Davi of Derivative Dribble started off his blog with The Not So Efficient Market (Theorem) Hypothesis, which explores the distinction between two different meanings. John Holbo has highlighted the EMH in his series of "refuted economic doctrines", which are now going to be made into a book "Dead Ideas From Live Economists".

By: David

David — Wed, 22 Jul 2009 00:43:21 +0000

I beleive it was common knowledge in 2006 to anyone who was paying attention. Certainly widely known enough for EMH to hold if EMH holds at all.

By: tg

tg — Tue, 21 Jul 2009 23:40:15 +0000

David, just saying that’s hardly widely available info.

(That’s not why I wrote, though. Like I said, I read the number elsewhere without citation in which it was critical for an argument – so I was just interested in where that specific number is coming from.)

By: David

David — Tue, 21 Jul 2009 23:34:32 +0000

tg, so what?

By: tg

tg — Tue, 21 Jul 2009 23:16:39 +0000

David,

I had just read another blog citing 55% yesterday, hence my interest.

From what I can tell, that 55% DTI is only for non-conforming loans and was a back-end DTI. That would have been a tough piece of data to cull in the moment, and likely would have been very few loans.

By: David

David — Tue, 21 Jul 2009 23:03:18 +0000

tg, personal anecdote. When I was shopping around for a mortgage in late 2006 I was hearing that from mortgage brokers. Googling DTI 55% turns up old sites like this one:

http://www.mortgagegrapevine.com/thread/?thread=474987

By: tg

tg — Tue, 21 Jul 2009 22:16:30 +0000

David,

Could you corroborate the 55% DTI limit. Where did you get that?

By: David

David — Tue, 21 Jul 2009 21:30:15 +0000

There is an assymetry between long and short which helps drive bubbles. Going short exposes you to unlimited risk. Buying puts requires a bet not only on how wrong the price is but when it will be corrected. I made a little money on long term puts on a couple of homebuilders, but I would have done much better had my puts expired a year later than they did.

So I think you can know there’s a bubble–I was certain of it for years before it popped–and yet be at a disadvantage when trying to profit from it. The only low-risk way to benefit is to not participate. Unfortunately, I couldn’t even get that right. I bought a house in 2007.

You asked about widely available info. There was plenty. The rate of growth relative to historical averages and the growth of personal income, rental propery selling with negative cash flow, posh hotels being converted to condos, DTI limits increasing from 25% to 55%, etc.