Market Indeterminacy

36 Pages Posted: 6 Oct 2003

See all articles by Alon Brav

Alon Brav

Duke University - Fuqua School of Business; European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

J.B. Heaton

One Hat Research LLC


"Market indeterminacy" is the inability to determine whether asset prices are efficient or inefficient, that is, whether or not asset prices fully and immediately reflect available information, such that no investor can earn abnormal expected returns by trading on available information at current prices. Market indeterminacy pervades asset markets because we lack reasonably precise models of "correct" prices, sometimes called models of "fundamental value," against which we can compare observed asset prices to detect efficiency and inefficiency. Arbitrageurs face market indeterminacy as well, so there is little reason to think that professional arbitrage will inevitably drive prices to fundamental values. Market indeterminacy casts doubt on the usefulness of the market efficiency concept in law and policy. For example, contrary to current practice there is insufficient scientific basis to characterize some markets as efficient and others as inefficient for purposes of the fraud-on-the-market theory of securities law. Market indeterminacy also undermines the reliability of event studies as a useful tool to measure the change in "fundamental value" at the time of an event, thus rendering event studies undependable in some litigation and policy applications. Finally, market indeterminacy makes it hard to regulate financial markets.

JEL Classification: G14

Suggested Citation

Brav, Alon and Heaton, J.B., Market Indeterminacy. Available at SSRN:

Alon Brav

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Durham, NC 27708-0120
United States
919-660-2908 (Phone)
919-684-2818 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

J.B. Heaton (Contact Author)

One Hat Research LLC ( email )

Chicago, IL
United States


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