Wednesday, February 01, 2006


Selling the public trust

The business press is where much of the serious news is to be found. Therefore, I was interested to read Emory economist Robert Chirinko's comment that RC: The Efficient Market Hypothesis says the market reacts to new information and prices reflect that information. When Greenspan gives a speech, financial markets should be volatile as that information is incorporated into bond and stock prices. And that's exactly what happens. But the thing we find remarkable is that minutes before a speech — we measured volatility in five-minute intervals — the markets are also volatile. ... The quick and accurate reaction to information is one aspect [to the Efficient Markets Hypothesis]. Another aspect is nonreaction to noninformation. The fact that Greenspan is giving a speech is not really new information. But we get a reaction an hour ahead of time. That's the puzzling part. That undercuts, to some extent, the Efficient Markets theory; it creates some concern. [emphasis added] Efficient Markets does not, repeat not predict an accurate reaction to the anticipated release of information. It predicts that any accurate reaction is the result of selective leakage of information. We know that certain US Senators have remarkable investment talents. It sounds as if either they or people at the Fed have been selling their public trust.
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