The subtle nature of market efficiency

Jean-Philippe Bouchaud

doi:10.1117/12.619468

23 May 2005 The subtle nature of market efficiency (Invited Paper)

Jean-Philippe Bouchaud

Proceedings Volume 5848, Noise and Fluctuations in Econophysics and Finance; (2005) https://doi.org/10.1117/12.619468
Event: SPIE Third International Symposium on Fluctuations and Noise, 2005, Austin, Texas, United States

Abstract

It is known since Bachelier 1900 that price changes are nearly uncorrelated, leading to a random-walk like behaviour of prices. We provide evidence for a very subtle compensation mechanism that underlies the 'random' nature of price changes. This compensation drives the market close to a critical point, which may explain the sensitivity of financial markets to small perturbations, and its propensity to enter bubbles and crashes. We argue that the resulting unpredictability of price changes is very far from the neo-classical view that markets are informationally efficient.

Citation Download Citation

Jean-Philippe Bouchaud "The subtle nature of market efficiency (Invited Paper)", Proc. SPIE 5848, Noise and Fluctuations in Econophysics and Finance, (23 May 2005); https://doi.org/10.1117/12.619468

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