The general theory of market efficiency
Capital Market Theory after the Efficient Market Hypothesis.
Professor Martin Shubik to his everlasting credit has consistently stated that MCT, EMH, and EPT are not a general law, but really relatively narrow special cases. He has time and again postulated a general law describing
markets. I picked up on Shubik's pioneering views about markets when, in a January 31, 2005, letter to the shareholders of Third Avenue Value Fund, I wrote a piece, "The General Theory of Market Efficiency." Professor Shubik has long been and remains a director of Third Avenue. This essay represents what I've learned from Shubik's views about markets. I, for one, believe that this General Theory makes a most important contribution to economic theory and economic practice!
Efficient-market hypothesis - Wikipedia
Modern Capital Theory (MCT) was born in the 1960s as a description of how markets operate. MCT has been widely accepted as a general law by most financial economists. The basic tenets of MCT revolve around the Efficient Market Hypotheses (EMH) and Efficient Portfolio Theory (EPT).
The Fallibility of the Efficient Market Theory: A New …
For about ten years after publication of Fama's classic exposition in 1970, the Efficient Markets Hypothesis dominated the academic and business scene. A steady stream of studies and articles, both theoretical and empirical in approach, almost unanimously tended to back up the findings of EMH. As Jensen (1978) wrote: ‘There is no other proposition in economics which has more solid empirical evidence supporting it than the EMH.’
This is embodied in the Efficient Market Hypothesis.
If a market is strong-form efficient, the current market price is the best available unbiased predictor of a fair price, having regard to all relevant information, whether the information is in the public domain or not. As we have seen, this implies that excess returns cannot consistently be achieved even by trading on inside information. This does prompt the interesting observation that must be the first to trade on the inside information and hence make an excess return. Attractive as this line of reasoning may be in theory, it is unfortunately well-nigh impossible to test it in practice with any degree of academic rigour.