Wednesday 23 October 2013

Should I walk randomly or efficiently?

Asset pricing models are flavour of the day. What puzzles me most is that the question has not been answered yet. Random walk or efficient markets. Should I base my investment decisions on short term or long term empirical data analysis? These models are effective in today’s scenario or they would be equally effective in a completely different set of rules?

What is commendable is that even in same or similar economic environment, two or more clashing views can be equally effective eventually leading to international recognition of this magnitude.
I was going through some of the news articles post announcement of this award. In the endeavour to summarise achievements of noble laureates, the author completely takes away the importance of their work.  Please see following excerpts from various news articles purely from the point of view of a layman –

Eugene Fama from the University of Chicago was praised for demonstrating that share prices are extremely difficult to predict in the short run, with new information quickly incorporated into prices.
Average Joe - I could have predicted this without a model.

Robert Shiller, from Yale University, was included for his 1980s discovery that stock prices fluctuate much more than corporate dividends.
Average Joe - Well who invests in stocks for dividends? Capital Gain is what makes the markets attractive.

Hansen is perhaps best known as the developer of a statistical technique called the generalized method of moments
Average Joe – I thought we were talking about Economics Nobel laureates.

But unfortunately I cannot afford to perceive their work in position of Average Joe. Asset pricing is undoubtedly the most important areas of work today. Decisions are tough evidently from three Nobel laureates – two sitting on extreme ends and one in the middle.
 

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