“the weak form of the hypothesis precludes the existence of predictable patterns in asset prices”

Not strictly true. Firstly, it is asset _returns_ (price movements plus dividends/coupons) that the EMH applies to; thus you get around 100% predictable stock price movements when stocks go ex-dividend.

Secondly, those returns are defined as excess returns over the risk free interest rate. Ignore that, and you get serial correlation in the returns due to serial correlation in the interest rates used to discount cashflows.

And Thirdly, even those excess returns in theory and practice have a predictable component. This is because volality varies through time in a semi-predictable manner, and this variation induces corresponding changes in risk premia and hence asset returns, which are predictable using lagged volatility (though this point is little known outside the inner sanctums of finance theory).

- Tim

These hypothesises are about the existance of strategies based on various sorts of information to outperform the market in general. However, what you seem to be looking at is whether things are predictable in the intuitive sense of the word, in particular the idea that one shouldn’t be able to predict a crash. However, one should certainly be able to have a model where everyone agrees that a certain stock will have value 0 at the end of the year but yet everyone’s expectation is that the stock price will increase so fast up till the point it crashes that the current price always reflects the expected future value of the stock.

In other words everyone knows it’s a bubble and knows the bubble will certainly be over by the end of the year (a prediction) and even agree on the probability distribution for when the crash is but yet the bubble price is such a fast growing function that the gamble on getting out before the bust has sufficiently high expectation to justify getting out before the bust.

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Secondly I’m a bit troubled by the confusing language you use suggesting the EMH is about getting the ‘value’ of the underlying asset correct. Once again EMH is about the value only in the sense of expected future prices not about some underlying notion of what the real value of the thing is truly. Once again just because the prices spiral out of proportion to the intrinsic worth/usefullness of the asset doesn’t mean the expectations don’t work out the correct way.

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Finally, on a broader point I’m troubled by the sorts of empirical demands you are putting on a claim that isn’t truly a direct empirical statement. I mean obviously phrased the way you do all the versions of the EMH are false. Surely
some sufficiently powerful alien computer or deity could take enough public information, the true laws of physics and enough computational power to derive better estimates of the stock market. However, it would be absurd to say this discredits the EMH.

The EMH isn’t really an empirical claim the way quantum field theory is, but rather the claim that a certain kind of economic model is a good approximation to use when trying to infer things about real markets. However, I think on this notion you need to be a lot more careful about the way in which the approximation is supposed to be good.

For a dissenting opinion check out Scott Sumner’s entry on his blog: http://blogsandwikis.bentley.edu/themoneyillusion/?p=695

“Once the EMH is abandoned, it seems likely that markets will do better than governments in planning investments in some cases (those where a good judgement of consumer demand is important, for example) and worse in others (those requiring long-term planning, for example).”

Wow, what an extremely reasonable and sane conclusion.

d.a. levy

“Really”
the police try to protect
the banks – and everything else
is secondary”

http://www.thing.net/~grist/ld/dalevy/daesa-gs.htm