Theory is changing traders’ behaviour. And vice versa
.. But the efficient-market hypothesis has repeatedly been challenged. When the American stockmarket fell by 23% in a single day in October 1987, it was hard to find a reason why investors should have changed their assumptions so rapidly and substantially about the fair value of equities. Robert Shiller of Yale won a Nobel prize in economics for work showing that the overall stockmarket was far more volatile than it should be if traders were adequately forecasting the fundamental data: the cashflows received by investors.
.. For information to be reflected in prices, there had to be trading. But why would people trade if their efforts were doomed to be unprofitable?
.. the average Joe has no hope of beating the market. But if you devote enough capital and computer power to the effort, you can succeed.
What the Vix Is Really Telling the Markets Now
There are good reasons not to worry about low Vix level—and one very good reason to keep close eye on it
The historical parallels are scary because when investors anticipate that volatility will be low, it can be sign of excessive complacency.
.. One of the things measured by the Vix is the balance between supply and demand for options. It’s a proxy (though not a perfect one) for the cost of protecting an S&P 500 portfolio against loss over the next 30 days. When it is very low, it suggests there are lots of people willing to sell insurance policies against a market fall, and few people wanting to buy protection.
.. Easy money encourages investors to pick up pennies of insurance premium in the options market, and to buy the dips in the S&P 500, the equivalent trade in equities.
.. Investors are prepared for some rise in volatility, but from an abnormally low level.
The puzzle then isn’t why the Vix is so low, but why the market has been so calm for the past couple of months. Why hasn’t there been a 1% move up or down in the S&P 500 since December 7? Bears might go back to central banks