Saturday, December 27, 2014

Market inefficiency

That markets are less than perfectly efficient is hardly a controversial proposition; indeed, several examples of notable market efficiencies were presented to the Supreme Court this past Term when it considered the continuing vitality to the fraud-on-the-market challenge in Halliburton.  Many of those examples, however, are several years old - which is why it was so amusing for me to see two new instances of dramatic inefficiencies just in the last month.

First, the New York Times published a piece, How Our Taxi Article Happened to Undercut the Efficient Market Hypothesis, explaining how publication of an article on falling medallion prices sent the stock price of Medallion Financial - a company that issues loans secured by taxi medallions - tumbling.  This was surprising because information about taxi medallion prices is public, so the stock should not have been reacted to the news.  Josh Barro, author of both pieces, speculates that the price drop may have occurred because some of the information in his article may have been difficult for investors to obtain, particularly since false information regarding medallion prices had been (inadvertently) circulated by the New York Taxi and Limousine Commission.

(Which, by the way, suggests that courts are correct to be wary of the "truth on the market" hypothesis - the argument often advanced by securities fraud defendants that even if their statements were false, it was canceled out by publicly available truthful information.  In the case of Medallion Financial, the false information apparently dominated over truthful information, at least so long as the truthful information was piecemeal and required effort to gather.)

The second example of market inefficiencies occurred when President Obama announced that the U.S. would be resuming diplomatic ties with Cuba.  The news sent the price of the Herzfeld Caribbean Basin Fund soaring, because that fund invests in companies that stand to benefit from improved diplomatic relations.  It also, apparently, boosted the price of any company that even appeared to be associated with Cuba, including shares of Cuba Beverage, which makes energy drinks and has nothing whatsoever to do with Cuba, the country.  The Wall Street Journal article on the subject offers other examples of similar sorts of investor confusion.

 Also, here is a blue Christmas tree that has been decorated to look like the Cookie Monster:

Seven-inch-blue-christmas-tree

 (x)

Happy holidays!

https://lawprofessors.typepad.com/business_law/2014/12/market-inefficiency.html

Ann Lipton | Permalink

Comments

What a crack up! Typical..

Posted by: Jeff | Dec 31, 2014 9:44:17 PM

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