Timeline for Is it possible to build a computer model to simulate a market to prove whether efficient theory is true or not?
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| Apr 20, 2020 at 3:10 | comment | added | mark leeds | right but there's risk in the SAP500. I should have said little to zero risk but I kind of implied by using the word "consistently". risk is a funny thing though right. Suppose someone consistently beats the SAP500 year in and year out and somehow we compute that he-she did it with less risk. Then, this pandemic rolls around and he-she gets killed just like the SAP500. Does that really mean that the market is efficient ? I don't think so. I'd say that the market is inefficient but even market inefficiencies can get beaten down because of tail events. | |
| Apr 19, 2020 at 21:50 | comment | added | Stéphane | Efficiency is a statement about the compensation for risk. The issue is not whether you can expect to profit above a riskless benchmark after transaction costs, but whether you could do it WITHOUT taking more risk. The whole issue here is that you don't know how much risk is tied to a trading strategy. You can estimate it if you make assumptions about the data generating process, but you don't see it. By the way, read your statement again: ALL theories that impose the absence of arbitrage allow you to profit above the risk free rate... just hold the S&P500. | |
| Apr 19, 2020 at 21:28 | comment | added | mark leeds | Stephane: Interesting answer and take on things. But, if one could build a model that profits ( above the risk free rate ) after transaction costs consistently, isn't this a proof of market inefficiency ? I agree that proving market efficiency is difficult but it doesn't seem terribly difficult to prove market inefficiency. | |
| Apr 19, 2020 at 19:53 | history | answered | Stéphane | CC BY-SA 4.0 |