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market always right?

Random walk rate and efficiency of technical analysis is certainly important to evaluate the effectiveness of the financial market. However, to determine the efficiency of the economy as a whole, they can say negligible. A more serious problem is the disparity in prices fundamental factors for a long time. To illustrate the problem can be consider the two most risky financial market - the stock market and FOREX.

interaction of three variables

classic investment analysis, contained in all textbooks on portfolio management, based on the model shown value (present value model). According to the model, the current price of the asset determined by the discounted stream of future expected cash payments (For stocks - discounted flow of dividends). Share price impact two factors: the expected dividends and razmep discount factor, which can be estimated by the real interest rate. Stock prices increase after disclosure of information about the upcoming increase in dividend payments and lowering interest rates.

Thus, the fundamental equilibrium price shares under the influence of the two components that determine the cumulative effect of permanent (permanent) changes in real dividend payments and the real interest rate. The difference between market and fundamental stock price is a temporary price component, through which possible over-or underestimation of the financial asset. Estimate of the deviation of the market prices from fundamental value is to quantify the shares to be made by each of the three components of the current stock price. To study degree of divergence of the fundamental and market rates in the historical retrospect, we consider the interaction of three variables:

• logarithm of the broader American Wilshire 5000 stock index;
• the real interest rate on 30-year corporate bonds that have BAA's investment rating agency Moody's;
• logarithm of total dividends paid (NIPA).

All three variables are adjusted for the GDP deflator to take into account impairment of assets due to inflation. Quarterly period of observation stretched from 1970, when he first made available data on the index Wilshire 5000 until 2003.

determine yield dividends not

Select Dividend as a determinant of stock prices At first glance, might seem questionable. No they determine the profitability of the securities. At the beginning of the 2000s, only 21% of issuers included in the listing of the largest U.S. stock exchanges, regularly paid dividends. These data are in stark contrast to late 1970s, when dividends are paid 67% of the companies. This position issuers is not any particular trend in the market - dividends do not pay the company for all sectors of the economy. Nevertheless, it remains an important factor in pricing the shares. The issuers that pay dividends accounted for 89% of the aggregate book value of firms and 88% market capitalization for the period 1971-1998 gg. Even in 1993-1998. When dividend payments were a rarity, to "pay" the company had 80% of the aggregate book value of firms and 77% of the capitalization of the stock market. Denial of double taxation of dividends, which occurred at President George W. Bush, Jr.., will only increase the dependence of the pricing of shares payments from companies. Preliminary assessment of the data showed that all variables have autocorrelation. For its recognition as the original data were considered growth of economic variables. Table 1 shows the results estimates of price components of shares on the basis of structural vector autoregression (Structural vector autoregression, SVAR) and the application of the correction errors. The columns show the proportion that are made by each of the components of variance Wilshire 5000 index. In the long term fluctuations of the stock 76% index determined by the dynamics of dividends, as 24% - the dynamics of real interest rate. In the short term, the reverse situation. About 70% per annum quarterly fluctuations occur due to short random changes of variables. They also give 40% of annual fluctuations, 35% - two-year and 20% - five years.

Rynok Always Prav

Thus, in the short term movement rates shares in no way connected with the fundamentals of pricing. Under the influence of temporary price component in the stock market enviable regularity observed the emergence and disappearance of the "soap bubbles. " Most of the volatility of U.S. stock market in 1980-1990-x years was determined by the permanent market dynamics. Over the last decades of the XX century, 50% of the variation in real prices of shares took place under impact of expected dividends, and 25% - due to changes in real interest rate. At the peak of "bubble" in the stock market high-tech and Internet companies in the middle of 1999, the Wilshire 5000 was overvalued 17%. By the beginning of the stock crisis in 2000, corporate securities in general have been revalued by 8%. By the end of 2002, when the "bubble" completely deflated and the bullish trend emerged, the market was undervalued already 14% (in 2003 the index rose by 17 %).

little use in practice

Traditionally, the dynamics of exchange rates is studied using macroeconomic models. Until the 1970s, was dominated by an approach to currency rate from the standpoint of the commodity market (goods market approach to exchange rate). These models include the purchasing power parity condition and Marshall-Lerner. According to the approach of the commodity market, changes in currency rate is determined by the balance of trade. However, in practice, trade balance weakly associated with the dynamics of the exchange rate.

daily turnover of world trade is about 3% daily turnover of the global currency market, which is currently stands at $ 1.2 trillion. After the 1970s in economic theory approach prevailed market assets (asset market approach to exchange rate). It combines a large number of models, including interest parity rates and the monetarist model. Under this approach, the change of currency rate associated with the movement of international capital. However, empirical studies have confirmed the high efficiency of the market approach assets [1, 2].

In fact, international macroeconomics, with its fundamental views on the exchange rate at an impasse, and now we are seeing the most real crisis theory. Need to make a few remarks on the problem mismatch in prices for financial assets fundamentals of pricing.

First, asset prices may deviate arbitrarily from the equilibrium value for long periods of time, which contradicts efficient market hypothesis. Causes excessive response of the market can be risk aversion and uncertainty of future economic situation, which give rise to excessive speculative possibilities. Second, development of a "bubble" has an intrinsic nature. Its dynamics define "Noise" traders (noise trader), active use of tools technical analysis. Chartists provoke excessive volatility in the short term, which leads to the phenomenon of random walk the prices of financial assets. Third, asset prices may fluctuate freely, regardless of fundamentals, but Nevertheless, there are limits of deviation from equilibrium of the market, so that in the long run, all speculative "bubbles" inevitably burst.

obvious inconsistency

Development of the concept of effective market for thirty years ago was a significant progress in financial science. Hypothesis possible to create a powerful analytical apparatus pricing for financial assets. During the 70's market efficiency, one not questioned. However, over the next two years, the credibility of the efficient market hypothesis has been undermined.

With the improvement of methods of applied research became apparent inconsistency of the concept of efficiency. Some conclusions drawn from it, got a complete refutation, whereas others continue to find empirical evidence. In particular, the change financial asset prices in the short term, as expected hypothesis, close to the random walk, the new information (although not the whole) relatively quickly taken into account in pricing, investment managers Funds are rarely able to show results, systematically superior market. With regard to other conclusions drawn from the hypothesis, theory and practice completely apart. On the market with an enviable regularity appear anomalies that allow to extract a guaranteed income, then the concept of efficiency does not allow. Some economists to support the hypothesis opinion that the matter lies in the inadequate pricing models for financial assets. Violation of the hypothesis may occur because of an inferiority theoretical models do not account for all factors of pricing. C this point of view of profitability and predictability of prices is represented as kind of compensation for risk, which makes up for the inaccuracy of models. However, the hypothesis to explain the existence of a violation of the risk premium can only in the short term. The failures of the hypothesis in the long run all also left without explanation.

test hypotheses about the effectiveness, understood as inability to obtain super-profits are also associated with considerable difficulties. The first obstacle is the definition of "normal" returns. Even if we ignore the volatility risk premium over time, and and the operating inefficiency of the market (including transaction costs and low liquidity), still remains unclear how significant coefficients in the regressions associated with earning potential.

«All in good time ...»

Top of the 2000s, the problem of assessing the effectiveness of has shifted from the study of the significance of coefficients, covariates in the direction of the economic interpretation of the analysis. The disadvantage approach the economic interpretation is that the very fact of receiving supernormal returns over a period of time yet not talking about market failure in the first place, because of the possibility of fitting data, and secondly, because of the complexity of testing the statistical significance such results.

Among the most serious failures of the concept of effective market listed mismatch of the theoretical and actual prices. By hypothesis that financial asset prices always correspond to the fundamental pricing factors. However, in reality, prices are considerably deviate from the equilibrium for long periods of time. The most striking examples of mismatch is theoretically "correct" and actually observed prices are the "bubbles", the latter of which burst in the U.S. market share of high-tech and Internet companies in 1999-2001.

Thus, the history and development of hypotheses efficient market is a perfect illustration of the biblical truth - "All in good time, time to be born and a time to die." The hypothesis was undeniable step forward in financial science. It is possible to create a family perfectly rational models. But with the deepening and development miropoznaniya financial science, we are forced to abandon the simple idea of ??an ideal market.

Sergei Moiseyev

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