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Proceedings Paper

The subtle nature of market efficiency
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Paper 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.

Paper Details

Date Published: 23 May 2005
PDF: 6 pages
Proc. SPIE 5848, Noise and Fluctuations in Econophysics and Finance, (23 May 2005); doi: 10.1117/12.619468
Show Author Affiliations
Jean-Philippe Bouchaud, Capital Fund Management (France)
SPEC, Commissariat a l'Energie Atomique (France)

Published in SPIE Proceedings Vol. 5848:
Noise and Fluctuations in Econophysics and Finance
Derek Abbott; Jean-Philippe Bouchaud; Xavier Gabaix; Joseph L. McCauley, Editor(s)

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