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Theme 5: Equilibrium and efficient markets


Financial analysts generally assume that markets are ``efficient'': that prices reflect all the information known to market participants and that consequently the market sets accurate prices for the assets it trades. Market crashes, large shifts in the relative valuations of industry groups, and other fluctuations without apparent causes are difficult to explain in these terms. Perhaps markets are efficient only when near an equilibrium point and cannot be relied upon for accurate feedback in the presence of rapid or discontinuous change.

Editor: John Walker