Are Prices Predictable in the Short Term?

29 Pages Posted: 2 Mar 2015 Last revised: 7 Jun 2015

See all articles by Nhat Le

Nhat Le

Vietnam National University of Ho Chi Minh City - School of Economics and Laws

Date Written: March 2, 2015

Abstract

Standard financial models assume that capital markets are fully efficient, which makes asset prices unforecastable. In contrast, the behavioral finance argues that markets may not be efficient, at least in the short term, given the limits to arbitrage. Combining both strands of literature, our paper provides evidence to suggest that multiple states of market efficiency may exist. More precisely, in this multi-equilibria world, “the market” can transit from one state to another and a shift in market norm affects price movements in a near future. Our empirical analysis suggests a possibility of asset price predictability in the short term, based on the evolutionary market efficiency.

Keywords: adaptive learning, price predictability, risk dominace, trend chasing

JEL Classification: C22, C73, G14, G17

Suggested Citation

Le, Nhat, Are Prices Predictable in the Short Term? (March 2, 2015). Available at SSRN: https://ssrn.com/abstract=2572195 or http://dx.doi.org/10.2139/ssrn.2572195

Nhat Le (Contact Author)

Vietnam National University of Ho Chi Minh City - School of Economics and Laws ( email )

Ho Chi Minh
Vietnam

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