The Modern View of the Stock Market
The great insights of the 1960s, half a century later.
The Middle Ground
Earlier this month, Cliff Asness and John Liew published "The Great Divide over Market Efficiency" in Institutional Investor. The article’s title refers to the half-century-long debate in the academic and institutional-investment communities, between those who advanced the theory in the 1960s that the stock market was very efficiently priced, and those who view pricing errors as commonplace. The 2013 Nobel Prize selections of Eugene Fama and Robert Shiller, members of the first and second camps, respectively, were a nod to the divide.
However, the Nobel selections also suggest the existence of a shared middle group. Had either camp dominated the past 50 years worth of evidence, the Nobels would not have been split. The U.S. stock market is capable of stranger behavior than the theorists originally believed; for example, it’s difficult to couch the 1987 market crash or late-1990s New Era rally in strictly rational terms. On the other hand, the failure of most professional money managers to capitalize on these opportunities supports the theorists' original intuition. To the extent that mispricings exist, they are very difficult to exploit.