Riskelia's blog

The inefficient market hypothesis

Posted on 15. juil, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés

The configuration of risky asset classes has been highly interesting these last weeks. Equities have experienced series of daily run ups and falls. As a matter of fact, the Euro Stoxx 50 made 6 consecutive bullish closes in a row twice in the same month.

The probability of observing 6 consecutive closes in the same direction followed by 6 consecutive closes  in the opposite direction equals: 2*1/(2)^12=(1/2)^11=0.05% or 1 chance every 2048 observations, i.e. once every 8 years in the context of efficient markets. We have observed comparable events twice this year!

The inescapable conclusion is that we have entered a period of high turbulence, with a higher than usual probability of sharp run ups and drawdowns.

Another sign supporting this view is our cumulated risk aversion index, which has resumed a bullish trend since the Global Risk Index has turned positive. In the past, such periods have been the stage of major liquidity crises (LTCM debacle in 1998, corporate credit crisis in 2002, subprime crisis in August 2007, Lehman’s debacle in 2008). ..

The frontier between crash and run up is tighter than ever. The publishing of banks’ stress test will be a key event in this regard as it could push the markets in either direction, as stated by the European Commission.

Tags: Bullish Trend, Credit Crisis, Crises, Debacle, Euro Stoxx 50, European Commission, Global Risk, Inefficient Market, Inescapable Conclusion, Lehman, Liquidity, Market Hypothesis, Risk Aversion, Risk Index, Stress Test, Turbulence, Ups