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

Ariane Szafarz

No 15-036, Working Papers CEB from ULB -- Universite Libre de Bruxelles

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.

Keywords: efficient markets; multiple solutions; rational expectations; speculative bubbles; volatility (search for similar items in EconPapers)
JEL-codes: B41 G10 G12 G14 (search for similar items in EconPapers)
Pages: 22 p.
Date: 2015-09-28
New Economics Papers: this item is included in nep-cfn and nep-hpe
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Related works:
Journal Article: Market Efficiency and Crises:Don’t Throw the Baby out with the Bathwater (2015)
Working Paper: Market Efficiency and Crises: Don’t Throw the Baby out with the Bathwater (2015)
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