The first source of stockmark et volatility relates to information changes. Information volatility has both a positive (efficient) dimension and a negative (inefficient) dimension. | C HAPTER 4 AMPLIFIED VOLATILITY The efficient market story and the chaotic market story are neither exhaustive nor mutually exclusive accounts of market behavior. Rather they depict end points on a continuum ranging from perfect pricing to substantial deviation between price and value. These polar points at the outer ranges of the continuum are a function of the amount of price volatility. Price volatility can move prices toward values and is efficient but can also push prices away from values and is inefficient . Measuring how much market behavior is captured by the efficiency story or the chaos story is hard. But if a generous estimate is that EMT has explained about 80 of stock market behavior in the past couple of decades an important question is how much it is likely to explain in the future. To answer that question we need to think about the sources of volatility in pricing and assess whether those sources are trending toward greater efficiency or greater pricevalue discrepancies. The sources of volatility that lead prices to part from fundamental values are 1 the quality of information used by market participants in trading 2 the complexity of the markets in which trades are effected and 3 the discipline of market participants. A good prognosis is that with the rise of on-line and computer-based trading and the spread of fountains of noisy information all through the Internet day and minute traders will drive market mania to an ever more acute state of bipolar disorder. Chaos rather than efficiency seems ascendant. INFORMATION VOLATILITY The first source of stock market volatility relates to information changes. Information volatility has both a positive efficient dimension and a negative inefficient dimension. 51 Copyright 2001 The McGraw-Hill Companies Inc. Click Here for Terms of Use 52 A Tale of Two Markets The efficient dimension of information volatility is simply the market s facilitation of price changes in the light of fundamental information about
