Why Investors Trade Under Efficient Markets

# Efficient Markets Paradox


# Efficient Markets Paradox












Basically all Quant Finance theory is build on No-Arbitrage presumption and Efficient Markets Hypothesis.

The known Grossman-Stiglitz Paradox says: if one can't make money from trading, one wouldn't trade any asset in the first place.

I did some private trading and watched markets over time, to see that markets are indeed becoming more and more efficient, so that prices already contain almost all available information on current and expected aspects, and only random unknown news changes the market. People may agree or disagree to that more or less, but overall there is convergence to strong Efficient Markets Hypothesis over last years.

How do practitioners see this development, and why are still so many trading despite the theory?

## Answer by Svisstack (score 1, accepted)

https://quant.stackexchange.com/a/14670

this is just theory, don't take it as serious, theory it's just take on approximation of reality and in this case not good one, people trade to check that strategy is profitable or trade because they think it will profitable, besides that you have many other spaces on what people compete with each other in this game

## Answer by GNUser (score 6)

https://quant.stackexchange.com/a/14656

Making money is not the only reasonable objective to trading. Another common reason is to manage/reallocate risk. For example, this is exactly the objective of liability-driven-investors, such as pension funds. They're specifically trying to match durations of their liabilities. It doesn't matter if pension fund managers believe there are no inefficiencies to exploit. They're required to continue managing duration based on their fund mandate and evolving conditions of their pension obligations.

## Answer by Felix (score 5)

https://quant.stackexchange.com/a/14669

The formation of asset price bubbles, such as the recent US housing market bubble, is perhaps the clearest indication that markets are not efficient. Hundreds of bubbles have been documented for all kinds of traded assets; see the tulip mania for an extreme case. Many practitioners also routinely use trading strategies such as momentum or reversion to the mean, which are incompatible with the efficient market hypothesis in any form.

Grossman and Stiglitz argued that markets cannot be informationally efficient because if they were, nobody would have any incentive to gather information and trade on it. The G&S paper was titled "On the Impossibility of Informationally Efficient Markets". There is also plenty of other academic work which challenges the EMH, for example Robert Shiller's for which he received the 2013 Nobel prize in economics.

## Answer by Good Guy Mike (score 2)

https://quant.stackexchange.com/a/14657

It's unclear what type of trading you are referring to (day trading sort of?). Also I'm not familiar with the aforementioned paradox. However, I think it's weird to say that you can't make money from trading, the semi-strong (strong) from of the EMH only states that the current share price incorporates all publicly (and non-publicly) available information. In other words; excess returns opportunities are unpredictable. Still, prices do change over time. This means that someone will always make money by trading, skill or no skill.

Also, there are other reasons for altering your portfolio, as mentioned by nsw.