Friday, March 23, 2007

The EMH vs. Jim Cramer

The business world is a buzz with reports on Jim Cramer's market manipulation admissions.

Cramer confesses that a hedge fund manager "must" use false rumors and strategically placed purchases to create the impression that a stock price is headed in the direction he wants. For example, Cramer argues that one could buy a bunch of puts on Apple stock and then call the reporters and say that someone in Apple has told you their relationship with the mobile phone carriers is breaking down.

Puts are contracts which allow you to sell your stock for a set price even if the market price plunges. The presence of a bunch of puts and negative rumors will lead many people to think that Apple stock is headed down. Cramer could then swoop in and buy it cheap.

So, a natural question for economists is - can the Efficient Market Hypothesis (EMH) hold up in the face of market manipulations like the ones Cramer describes?

Comments are welcome. My thoughts tomorrow.

Background Here

15 comments:

Yancey Ward said...

Sounds like poker to me. How does EMH apply to Texas Holdem?

Barry Ritholtz said...

I dont know why the track back didnt work

try this link:
http://www.typepad.com/t/trackback/763/17101100

dWj said...

Actually, if you "have" to do this to make above-market returns, it suggests the market is pretty efficient.

I think the market is pretty efficient, more on large scales and time frames, less on small scales and time frames. Cramer's games work best for short periods of time, for single stocks, especially those of small companies -- check your junk mail box for an illustration of this.

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