Mr. Luis Miranda pays a tribute to Eugene Fama in an op.ed for MINT. In his natural desire to sign the praises of the winner of the ‘Bank of Sweden’ prize for economics in 2013, he eschews conceptual rigour.
A market crash does repudiate efficient markets theory because, among other things, efficient markets postulate that financial markets (and hence asset prices) discount all relevant (publicly available) information instantaneously.
A crash is a ‘catch-up’ on the part of the market with information unless that information was really ‘news’ to the market. Therefore, a crash reveals that financial markets (and investors) have not been linearly and continuously discounting relevant information. In other words, asset prices had decoupled from information. That is what a crash proves. Hence, one of the tenets of market efficiency is disproved by market crashes.
The presence of active fund managers,the search for and the willingness to pay for alpha repudiate conclusively market efficiency theory.
Like all theories in social sciences, it was at best a point of departure to analyse the real world. At worst, it was a comprehensive misrepresentation of reality.
In recent years, Prof. Fama has rallied behind the calls (by Prof. Anat Admati) for banks to beef up their equity capital. He has signed at least one open letter to regulators to dismiss bank claims against having higher equity capital. So, I am prepared to ‘overlook’ his work on financial market efficiency.
(p.s: Did not know until I went through this interview of Robert Shiller with the Washington Post newspaper that Janet Yellen and Prof. George Akerlof were couples. John Kay seems to mirror my thoughts on the bizarre logic behind the Nobel Committee’s selection of economists and their underlying philosophies).