Decision-making under Market Indeterminacy

The Efficient Markets Hypothesis (EMH) is the focusing topic in the past 50 years of financial market researches. Many empirical studies are then provided that want to test EMH but have no consensus. The perception of EMH determines the attitude and strategy of participants and regulators in financial market. One perception of EMH argues that investors’ behavior of seeking abnormal profits and arbitrage drives prices to their ‘‘correct’’ value. Investigating the “correct” value derives the concept of “market indeterminacy”. It means the inability to determine whether stock prices are efficient or inefficient. Market indeterminacy pervades stock markets because “correct” prices are unknown because of imperfect information and model sensitivity. Market indeterminacy makes arbitrage risky and makes event studies unreliable in some policy and litigation applications. The concept of market efficiency is needed to be re-recognized considering the mechanism of price formation. In order to further research and practice in law and financial market, there needs a view from the “jumping together” of disparate disciplines. Adaptive Markets Hypothesis(AMH) that using the evolutionary principles in financial market is a new viewpoint oncognitive decision and deserves to be paid more attention to.

Market Exchange and Alienation

Efficient markets are alienating if they inhibit us from caring about one another inour productive activities. I argue that efficient market behaviour is bothexclusionary and fetishistic. As exclusionary, the efficient marketeer cannotmanifest care alongside their market behaviour. As fetishistic, the efficientmarketeer cannot manifest care in their market behaviour. The conjunction entailsthat efficient market behavior inhibits care. It doesn’t follow that efficient marketbehavior is vicious: individuals might justifiably commit to efficiency becausedoing so serves the common good. But efficient market systems nevertheless havesignificant opportunity costs. This serves as a corrective to the prevailingassumption amongst welfare state capitalists, liberal egalitarians and marketsocialists that resolving distributive objections to markets will resolve thisrelational objection. 

Financial Economics of United States Slavery

Financial economics reveals that slaves were profitable investments and that the rate of return from owning slaves was at least as high as the return on comparable investments. The profitability of slavery depended on both the productivity and the market valuation of slaves. Owners increased the productivity of slaves by developing better strains of cotton, employing more efficient systems of production (gang labor), and using force and coercion (whippings). Efficient markets facilitated the interregional transfer of labor, and selective sales devastated slave families. Market studies show that slave prices reflected the capitalized value of labor and that they varied based on labor productivity. The profitability of slaves and the availability of efficient markets made slaves attractive investment vehicles for storing wealth. Their attractiveness as investments, however, may have had some other costs. Several studies argue and provide evidence that investment in slaves supplanted investment in other forms of physical and human capital, much to the detriment of southern industrialization and development. Besides serving as investment vehicles, slaves also facilitated financing. A growing body of work provides evidence that slaves were pledged as collateral to obtain credit.

The Securities Act Registration Framework

This chapter addresses the Securities Act registration framework. In its determination to maintain a transaction-based Securities Act registration framework while making necessary adjustments, the SEC has appropriately acted. With the improvements made, the registration framework functions in a relatively efficient manner and generally provides investors with adequate safeguards. Nonetheless, significant deficiencies exist which are addressed in this chapter. Among the improvements that should be implemented are: mandating that all material information (absent a meritorious business justification) be contained in a registration statement; limiting the use of incorporation by reference to those issuers whose securities in fact trade in efficient markets; and requiring that a sufficiently comprehensive summary section be included in the statutory prospectus. The chapter also focuses on due diligence and the integrated disclosure system. In the context of incorporation by reference and shelf registered offerings, the dilemma faced by outside directors and underwriters in performing their due diligence functions can be largely ameliorated by: for outside directors, the presence of a vibrant disclosure committee (comprised solely of outside directors) that is actively engaged in the disclosure process; and, for underwriters, the retention by a subject company’s audit or disclosure committee of a reputable law firm to conduct continuous due diligence on the prospective underwriter’s behalf.

Fractal Markets, Frontiers, and Factors

We develop an alternative view to the modern finance theory that essentially suggests equilibria in efficient markets by taking a risk-based view of asset returns in stock markets. Based on a mathematical analysis of stock market data using multi-scale approaches, we will alternatively describe markets and factors as trend-based fractal processes and analyze well-known factor premiums, which leads to a return-based view of markets and a model of investors reacting to market environments. We conclude that markets could be viewed alternatively as fractal, non-stationary and, at most, asymptotically efficient.

A New Measure of Market Inefficiency

Financial crises, such as the Great Financial Crisis of 2007–2009 and the COVID-19 Crisis of 2020–2021, lead to high volatility in financial markets and highlight the importance of the debate on the Efficient Markets Hypothesis, a corollary of which is that in an efficient market it should not be possible to systematically make excess returns. In this paper, we discuss a new empirical measure—Excess Trading Returns—that distinguishes between market and trading returns and that can be used to measure inefficiency. We define an Inefficiency Matrix that can provide a complete, empirical characterization of the inefficiencies inherent in a market. We illustrate its use in the context of empirical data from a pair of model markets, where information asymmetries can be clearly understood, and discuss the challenges of applying it to market data from commercial exchanges.

Efficient Markets Hypothesis in the time of COVID-19.

This paper examines how the largest stock market of the world, the U.S., and particularly the S&P500 index, reacted during the COVID-19 outbreak (02.01.2020-30.04.2020). Using simple financial and corporate analysis (adopting Constant Growth Model) procedures for our theoretical framework, we juxtapose the released news with the respective market performance in order to examine if the stock market always incorporated the available information in time. We show that the market in some sub-periods was not moving as it was expected, and the runs-test statistically confirmed our assumptions that the US stock market was not efficient during the COVID-19 outbreak. We find that in some cases the market does not incorporate the news instantly, is irrational, and non-sensible. All these make the market’s behavior unpredictable for a rational asset pricing model because as this paper shows even the simplest financial theories could explain rational behavior, but the market presented a different performance.