Going Back to the Basics - Rethinking Market Efficiency

Posted: 20 Dec 1998

Abstract

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

Olsen, Richard B. and Dacorogna, Michel M. and Müller, Ulrich A. and Pictet, Olivier V., Going Back to the Basics - Rethinking Market Efficiency. Available at SSRN: https://ssrn.com/abstract=5383

Richard B. Olsen (Contact Author)

Lykke Corp ( email )

Baarerstrasse 2
Zug, Zug 6300
Switzerland
41793368950 (Phone)

HOME PAGE: http://www.lykke.com

Michel M. Dacorogna

DEAR-Consulting ( email )

Scheuchzerstrasse 160
Zurich, 8057
Switzerland
+41795447327 (Phone)

Ulrich A. Müller

Olsen & Associates ( email )

Seefeldstrasse 233
CH-8008 Zurich
Switzerland
+41 (1) 386 48 16 (Phone)
+41 (1) 422 22 82 (Fax)

Olivier V. Pictet

Pictet Asset Management ( email )

Geneva
Switzerland

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