Re: Market Predictions

From: John Conover <>
Subject: Re: Market Predictions
Date: 8 Apr 1999 07:01:17 -0000 writes:
> The efficient market hypothesis does imply that future market
> movements are not predictable, not because "everybody can't profit"
> but because today's market prices reflect the market's best judgment
> of future economic performance.  So, absent additional information,
> the odds that the market will rise equal the odds that it will fall.
> Thus the much debated "Random Walk Down Wall Street"

Hi Grinch. That's a good way to put it.

The EMH, formally, does not require statistical independence of the
marginal increments, (ie., returns.) The random walk model

However, if returns are random, then the market is efficient. But it
is not necessary that an efficient market be random.

The apparent Pareto-Levy, (eg., stable Paretian, or fractal, a la
Mandelbrot,) distribution of the marginal increments of the DJIA,
S&P500, and NYSE Composite, as shown in:

illustrates significant leptokurtosis in the equity markets, and would
tend to imply that the markets are not efficient, (at least in the EMH
sense,) since the variance would be undefined or infinite, and risk
can not be equated to variance-a cornerstone paradigm of the EMH,
(along with the presumptions that investors are rational-at least in
the aggregate-and a linear relationship between cause and effect based
on new information in the marketplace. Not to mention the paradigm
that a large number of independent estimates results in a "fair" value
of an equity by the aggregate market.)

FWIW ...


BTW, I think the original question regarding efficiency of the markets
was probably more directed at capital market theory, which is based on
three similar concepts to the EMH; 1) the investors are rational, and
require mean/variance efficiency to assess potential returns by
probabilistic methodologies where risk = variance; 2) the markets are
efficient, where prices reflect all public information and changes in
price are not related, (ie., independent increments,); and 3) because
of 1 and 2, the probabilities follow a random walk, ie., have a normal
or Gaussian distribution-the returns have finite mean and
variance. Unfortunately, the capital market theory can not accommodate
leptokurtosis, as the EMH couldn't. A similar argument can be made
against the Capital Asset Pricing Model, (CAPM), which relates
variance of different equity prices to the standard deviation of the
marginal increments, exactly as in the EMH.


John Conover,,

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