Going Back to the Basics - Rethinking Market Efficiency
Posted: 20 Dec 1998
The real-life experience of our customers shows that we successfully forecast foreign exchange (FX) price movements for short to medium-term time horizons. This is substantiated by a positive forecast quality and high trading model returns. We have to ask ourselves why O&A is able to forecast. Are we successful in capturing the inefficiencies of the FX market? Since this market is widely held to be the most efficient financial market, we should ask a more pertinent question: Does our success not conflict with the theory of efficient markets, which precludes the ability to forecast and denies the existence of profitable trading models? The discussion paper explains why, contrary to the statement of the efficient market theory, we have succeeded in developing successful forecasting and profitable trading models. We believe that there are a number of reasons, which are all associated with market dynamics. We emphasize that such explanations are highly tentative. In particular, we think that many years of hard investigation will be needed to prove scientifically that the claims made here are actually valid. To facilitate this research we also suggest some ideas for a new definition of market efficiency at the end of the paper.
JEL Classification: F31, G14
Suggested Citation: Suggested Citation