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Cootner concludes that the stock market is not a random walk.

(c) no group of investors will beat the market in the long term. Given the number of investors in financial markets, the laws of probability would suggest that a fairly large number are going to beat the market consistently over long periods, not because of their investment strategies but because they are lucky. It would not, however, be consistent if a disproportionately large number of these investors used the same investment strategy.

Proposition 1: The probability of finding inefficiencies in an asset market decreases as the ease of trading on the asset increases. To the extent that investors have difficulty trading on a stock, either because open markets do not exist or there are significant barriers to trading, inefficiencies in pricing can continue for long periods.

Taussig published a paper under the title, “Is Market Price Determinate?”

He was also the first to consider the “joint hypothesis problem”.

Stiglitz show that it is impossible for a market to be perfectly informationally efficient.

I have argued (Smart 2008) just how unreasonably low these existential risks (species-killing meteorites, solar flares, gamma ray bursts, pandemics, wars, etc.) appear to be.

At scales larger than humanity, we can find immunity candidates in the unreasonably life-friendly nature of the universe as a system (Davies 2004), and in Earth’s geophysical systems, as characterized in the Gaia hypothesis (Lovelock and Margulis 1974).

This paper marked the start of behavioural finance.

Smart 2002a estimates that in our galaxy alone, if there are 2 million to 2 billion civilizations our age or older in the Milky Way, occupying the galactic habitable zone, a ring of stars around our galaxy's core, then assuming a 200 year signal lifespan we should currently be able to detect anywhere from 20 to 20,000 low power leakage signals in our sky, if we had a radiotelescope sensitive enough to survey the entire galaxy.

In other words, research findings cause the market to become more efficient.


Zero balance account (ZBA): A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.
Zero-coupon bond: A bond that pays no interest but sells at a deep discount from its face value; it provides compensation to investors in the form of price appreciation. Semi-strong form efficient market A market in which prices fully reflect all publicly available information.
Zero profit: A situation in which profit in an industry is zero, usually as a result of free entry and exit. It may, if firms are not identical, refer only to the marginal firm. And it always means zero excess profit, not that all returns to capital invested in the industry are zero.
Zero substitution: An elasticity of substitution of zero. In a production function, this means a Leontief technology.
Zero sum game: A game in which the payoffs to the players add up to zero, so that a gain for one is necessarily equaled by loss to others. It contrasts with positive sum game.

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Market Efficiency for Investor Groups


Implications of market efficiency


Yankee Bonds: Dollar-denominated foreign bonds sold in the United States.
Yankee Stock Issues: Stock sold by foreign companies to U.S. investors.
Yield curve: A graph of the relationship between yields and term to maturity for particular securities.
Yield to maturity (YTM): The expected rate of return on a bond if bought at its current market price and held to maturity. The discount rate that equates the present value of interest payments and redemption value with the present price of the bond.
Yield: The amount of return on an investment; the interest rate

What market efficiency does not imply:

(a) Market efficiency does not require that the market price be equal to true value at every point in time. All it requires is that errors in the market price be unbiased, i.e., that prices can be greater than or less than true value, as long as these deviations are random.

An efficient market does not imply that -

It is possible to go further and design institutions that help people make better choices, as defined by the people who choose. One successful effort along these lines is Richard Thaler and Shlomo Benartzi’s (2004) “Save More Tomorrrow” program (SMarT). Under the SMarT plan, employers invite their employees to join a plan in which employees’ contribution rates to their 401(k) plan increase automatically every year (say, by two percentage points). The increases are timed to coincide with annual raises, so the employee never sees a reduction in take-home pay, thus avoiding loss aversion (at least in nominal terms). In the first company that adopted the SMarT plan, the participants who joined the plan increased their savings rates from 3.5 percent to 13.6 percent after four pay raises (Thaler and Benartzi 2004).

Necessary conditions for market efficiency

(b) The fact that the deviations from true value are random implies, in a rough sense, that there is an equal chance that stocks are under or over valued at any point in time, and that these deviations are uncorrelated with any observable variable. For instance, in an efficient market, stocks with lower PE ratios should be no more or less likely to under valued than stocks with high PE ratios.

Propositions about market efficiency

(c) If the deviations of market price from true value are random, it follows that no group of investors should be able to consistently find under or over valued stocks using any investment strategy.

Emerging Market Stocks: Do they make excess returns?


Wage: The payment for the service of a unit of labor, per unit time. In trade theory, it is the only payment to labor, usually unskilled labor. In empirical work, wage data may exclude other compensation, which must be added to get the total cost of employment.
Wage-rental ratio: The ratio of the wage of labor to the rental price of either capital or land, whichever is the other factor in a two-factor Heckscher-Ohlin model. The ratio plays a critical role in this model since it determines the ratios of factors employed in both industries.
Waiver: An authorized deviation from the terms of a previously negotiated and legally binding agreement. Many countries have sought and obtained waivers from particular obligations of the GATT and WTO.
Walras' Law: The property of a general equilibrium that if all but one of the markets are in equilibrium, then the remaining market is also in equilibrium, automatically. This follows from the budget constraints of the market participants, and it implies that any one market-clearing condition is redundant and can be ignored.
Walrasian adjustment: A market adjustment mechanism in which price rises when there is excess demand and falls when there is excess supply. Strictly speaking, these excess supplies and demands are those that would obtain without any history of disequilibrium, as with a Walrasian auctioneer.
Walrasian auctioneer: A hypothetical entity that facilitates market adjustment in disequilibrium by announcing prices and collecting information about supply and demand at those prices without any disequilibrium transactions actually taking place.
Warehouse receipt: A receipt issued by a warehouse listing the goods received.
Warehouse-to-warehouse: An insurance policy that covers goods over the entire journey from the seller's to the buyer's premises.
Warrant: An option issued by a company that allows the holder to purchase equity from the company at a predetermined price prior to an expiration date. Warrants are frequently attached to Eurobonds. A relatively long-term option to purchase common stock at a specified exercise price over a specified period of time.
Water in the tariff: The extent to which a tariff that is higher than necessary to be prohibitive.
Weak form efficient market:A market in which prices fully reflect the information in past prices.
Wealth: The total value of the accumulated assets owned by an individual, household, community, or country.
Weight note: Document issued by either the exporter or a third party declaring the weight of goods in a consignment
Weighted Average Cost of Capital (WACC): The required return on the funds supplied by investors. It is a weighted average of the costs of the individual component debt and equity funds. A discount rate that reflects the after-tax required returns on debt and equity capital.
Welfare criterion: A basis, usually quantitative, for judging whether one state of the world or of an economy is better than another, for use in welfare economics and in evaluation of policies.
Welfare economics: The branch of economic thought that deals with economic welfare, including especially various propositions relating competitive general equilibrium to the efficiency and desirability of an allocation.
Welfare proposition: In trade theory, this usually refers to any of several gains from trade theorems.
Welfare state: A set of government programs that attempts to provide economic security for the population by providing for people when they are unemployed, ill, or elderly.
Welfare triangle: In a partial equilibrium market diagram, a triangle representing the net welfare benefit or loss from a policy or other change. In trade theory it often means the triangle or triangles representing the deadweight loss due to a tariff.
Welfare: Refers to the economic well being of an individual, group, or economy. For individuals, it is conceptualized by a utility function. For groups, including countries and the world, it is a tricky philosophical concept, since individuals fare differently. In trade theory, an improvement in welfare is often inferred from an increase in real national income.
Wharfage charge: A charge assessed by a pier or dock owner for handling incoming or outgoing cargo.
White knight: A friendly acquirer who, at the invitation of a target company, purchases shares from the hostile bidder(s) or launches a friendly counter bid in order to frustrate the initial, unfriendly bidder(s).
Willingness to pay: The largest amount of money that an individual or group could pay, along with a change in policy, without being made worse off. It is therefore a monetary measure of the benefit to them of the policy change. If negative, it measures its cost.
Wire transfer: A generic term for electronic funds transfer using a two-way communications system, like Fedwire.
Withholding tax: A tax on income that is levied at the source, thus diverted to the government before the recipient of the income ever sees it. Used in international tax treaties to assist tax collection. A tax on dividend or interest income that is withheld for payment of taxes in a host country. Payment is typically withheld by the financial institution distributing the payment.
Working capital management: The administration of the firm's current assets and the financing needed to support current assets.
Working capital: An accounting term that indicates the difference between current assets and current liabilities. The combination of current assets and current liabilities.
World Bank: A group of five closely associated international institutions providing loans and other development assistance to developing countries. The five institutions are IBRD, IDA, IFC, MIGA, and ICSID. As of July 2000, the largest of these, IBRD, had 181 member countries. International Bank for Reconstruction and Development. An international organization created at Breton Woods in 1944 to help in the reconstruction and development of its member nations. Its goal is to improve the quality of life for people in the poorer regions of the world by promoting sustainable economic development. See also International Bank for Reconstruction and Development.
World Fact Book: An excellent source of information about the countries of the world, including basic economic data.
World price: The price of a good on the world market, meaning the price outside of any country's borders and therefore exclusive of any trade taxes or subsidies that might apply crossing a border into a country but inclusive of any that might apply crossing out of a country.
World Trade Organization (WTO): The WTO is a multilateral organization that promotes free and fair trade among the nations of the world. It was created in 1995 by 121 nations at the Uruguay Round of the General Agreement on Tariffs and Trade (GATT). The WTO is responsible for implementation and administration of the trade agreement. A global international organization that specifies and enforces rules for the conduct of international trade policies and serves as a forum for negotiations to reduce barriers to trade. Formed in 1995 as the successor to the GATT, it had 136 member countries as of April 2000.
Worldwide tax system: A tax system that taxes worldwide income as it is repatriated to the parent company. Used in Japan, the United Kingdom, and the United States.

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