Many theories of stock market efficiency rely on a diversity of opinions regarding the “correct” value of an investment. This is necessary first to generate liquidity (people trade when they have different opinions of a stocks value, because they both think they are better off), and to process the huge amount of information which influences prices. No model of the stock market should believe thatall actors have all information, and come to the same conclusion.
So it was interesting to see this blurb from the Economist:
Financial journalists’ writing becomes more homogeneous as markets rise
Perniciously, opinions become more homogeneous as markets are rising, and more diverse as they fall. Obviously, this may be herding behavior in which good news is assessed un-critically, and bad news is dissected widely. Unfortunately, that would lead to greater bubbles.
But is this contrarian signal profitable?