On my daily ride home from school to the Suzhoujie subway station I was caught off guard when I biked across an intersection and was promptly hit by – not a reckless Beijing car, but – a gale-force wind that threatened to tip me over, angular momentum be damned. I gritted my teeth and leaned into the wind until finally, hair askew, I creaked across the intersection and entered the wind-shield area of the corner building.
As much as I had been hit by billions of air molecules, I was also hit by a simple thought. One of the age-old questions in finance and economics is the efficiency of markets, one question which, even in relatively well-educated circles, plays out in a number of trite formulations:
- Markets are efficient because any mispricings are easily and therefore quickly arbitraged away, leaving only zero-sum risky profits on the table to be picked at by speculators.
- OK, Markets may not be efficient, but you and I aren’t smart enough or don’t have enough information to generate consistent profits from these inefficiencies. (I will call this the Markel school of thought - Leo Markel is a Huntsman senior conducting research on behavioral finance while simultaneously being a strong advocate of weak-form efficiency – He is also remarkably good at basketball while being your typical white boy in every way. An object lesson in contrasts.)
- Markets in securities of financial institutions are efficient because of mark-to-market accounting rules which force balance sheets to reflect economic reality much more rapidly than fungible real-economy balance sheets (A severe case of back-to-front cause-and-effect mixup in my opinion.)
One of the most useful things I learned from my Topics in International Finance case was an example of inefficiency: China Mobile is listed, in nonconvertible RMB, on the Shanghai board, as well as the convertible HKD Hang Seng, as well as in ADR form on NYSE. Prices on all three indicate different market valuations. How different?
note: this article is yet to be finished
Do macro atmospheric movements provide a model for understanding macro flows of funds? In the final analysis, massive flows of air may actually be less ephemeral than transfers of money
