Free lunch Q

[Dwight]

Some analysts have suggested that the stock market offers “no free lunches”. Considering both “efficient markets” and “inefficient markets”, indicate whether the statement “there is no free lunch” is often valid or is never valid by circling the correct response and providing an explanation in the indicated space.
—-MARKET TYPE————-STATEMENT IS—————–EXPLANATION
–Efficient Market——Often valid / Never valid———–
Inefficient Market—–Often valid / Never valid———–

 

[GetSetGo]

efficient market - valid - no free lunch
inefficient market - never valid - some times u get free lunches (but tranaction costs and liquidity can kill you most of the time).

 

[Deleted User]

Efficient Market - Valid : lunch is used to entice the ‘freebie-receiver’ to correspond with a favourable action to the ‘freebie-giver’ because CFA standards prevent us from bribing with cash.
Inefficient Market - Valid : Cash is preferable. I can buy my own lunch and don’t have to talk to the ‘cash-giver’.

 

[cjones65]

It depends… are you a specialist or corporate insider? As I recall, they eat out for free quite often.

 

[also]

Of course there aren’t. If there were, everyone would want to work on a stock exchange.

 

[Dwight]

GetSetGo Wrote:
——————————————————-
> efficient market - valid - no free lunch
> inefficient market - never valid - some times u
> get free lunches (but tranaction costs and
> liquidity can kill you most of the time).
Very close GetSetGo.
–Efficient Market——Often valid———–In efficient markets, “free lunches” in the form of arbitrage profits are not possible, because prices rapidly adjust to their true intrinsic values.
Inefficient Market—–Often valid———–Mispricing can persist either through persistent irrationality or because the risks are too high. Thus “free lunches” in the form of arbitrage profits may not be realized.

 

[Black Swan]

I visited the NYSE once and was served a free lunch, so yes?

 

[also]

Was it efficient or inefficient?
We’re really narrowing down the issue here.

 

[Black Swan]

the catering service seemed pretty efficient

 

[maratikus]

That was a good question. I liked the official explanation too.

 

[AFJunkie]

This is a silly question . I can tell you that for a FACT NOT ALL MARKETS ARE EFFECIENT. Take a look at where corporate basis are trading right now. If you long a corp bond and long the single name CDS of that name there is a 100bp disparity. Why if the long CDS hedges your credit risk? Because it has to do with financing your cash bond position and nothing to do with the fundamentals of the trade. Its purely a technical dislocation which, if i’m not mistaken, shouldn’t happen according to the effecient market theory.

 

[also]

> I can tell you that for a FACT NOT ALL MARKETS ARE EFFECIENT.
Is this a LIII forum?
Please confirm!

 

[MFE]

AFJunkie Wrote:
——————————————————-
> This is a silly question . I can tell you that for
> a FACT NOT ALL MARKETS ARE EFFECIENT. Take a look
> at where corporate basis are trading right now. If
> you long a corp bond and long the single name CDS
> of that name there is a 100bp disparity. Why if
> the long CDS hedges your credit risk? Because it
> has to do with financing your cash bond position
> and nothing to do with the fundamentals of the
> trade. Its purely a technical dislocation which,
> if i’m not mistaken, shouldn’t happen according to
> the effecient market theory.
aren’t you taking on counterparty risk & Mark to Market Risk?

 

[AFJunkie]

MFE Wrote:
——————————————————-
> AFJunkie Wrote:
> ————————————————–
> —–
> > This is a silly question . I can tell you that
> for
> > a FACT NOT ALL MARKETS ARE EFFECIENT. Take a
> look
> > at where corporate basis are trading right now.
> If
> > you long a corp bond and long the single name
> CDS
> > of that name there is a 100bp disparity. Why if
> > the long CDS hedges your credit risk? Because
> it
> > has to do with financing your cash bond
> position
> > and nothing to do with the fundamentals of the
> > trade. Its purely a technical dislocation
> which,
> > if i’m not mistaken, shouldn’t happen according
> to
> > the effecient market theory.
>
>
> aren’t you taking on counterparty risk & Mark to
> Market Risk?
mark to market risk and counterparty risk existed a year ago and still do today. I dont see how this could explain the current disparity. Humans make trading decisions, we are not effecient beings so nethier are the markets. If you disagree i’d like to point you to exibit A: James Simons (eg. Founder of Renaissance Technologies) he’s been generating an annualized return of about 50% a year since 1982.

 

[maratikus]

AFJunkie,
I don’t think anyone is saying that markets are efficient. However, it’s still hard to take advantage of those inefficiencies. James Simons is definitely an outlier. Even if he’s making money it doesn’t mean that his returns represent free lunch. Simons gets rewarded for taking certain risks. Would you say that investing money in Renaissance has no risk?

 

[MFE]

“mark to market risk and counterparty risk existed a year ago and still do today. I dont see how this could explain the current disparity.”
Point 1) but you are stilll taking on risk, therefore by definition, this is not arbitrage
Point 2) that risk is greater today then it was 2 years ago, thus the apperance of a market disparity.

 

[maratikus]

interesting article about performance of Renaissance in Aug of 2007:
http://www.nytimes.com/2007/08/10/business/renaissance-wire.html?ex=1344...

 

[1morelevel]

AFJunkie Wrote:
——————————————————-
> This is a silly question . I can tell you that for
> a FACT NOT ALL MARKETS ARE EFFECIENT. Take a look
> at where corporate basis are trading right now. If
> you long a corp bond and long the single name CDS
> of that name there is a 100bp disparity. Why if
> the long CDS hedges your credit risk? Because it
> has to do with financing your cash bond position
> and nothing to do with the fundamentals of the
> trade. Its purely a technical dislocation which,
> if i’m not mistaken, shouldn’t happen according to
> the effecient market theory.
Don’t forget the couterparty risk for a CDS transaction. A Macy’s bond + an equal maturity CDS contract is not a transaction without credit risk.

 

[1morelevel]

AFJunkie Wrote:
——————————————————-
> MFE Wrote:
> ————————————————–
> —–
> > AFJunkie Wrote:
> >
> ————————————————–
>
> > —–
> > > This is a silly question . I can tell you
> that
> > for
> > > a FACT NOT ALL MARKETS ARE EFFECIENT. Take a
> > look
> > > at where corporate basis are trading right
> now.
> > If
> > > you long a corp bond and long the single name
> > CDS
> > > of that name there is a 100bp disparity. Why
> if
> > > the long CDS hedges your credit risk? Because
> > it
> > > has to do with financing your cash bond
> > position
> > > and nothing to do with the fundamentals of
> the
> > > trade. Its purely a technical dislocation
> > which,
> > > if i’m not mistaken, shouldn’t happen
> according
> > to
> > > the effecient market theory.
> >
> >
> > aren’t you taking on counterparty risk & Mark
> to
> > Market Risk?
>
> mark to market risk and counterparty risk existed
> a year ago and still do today. I dont see how this
> could explain the current disparity. Humans make
> trading decisions, we are not effecient beings so
> nethier are the markets. If you disagree i’d like
> to point you to exibit A: James Simons (eg.
> Founder of Renaissance Technologies) he’s been
> generating an annualized return of about 50% a
> year since 1982.
Hasen’t the market also repriced counterparty and AA bank credit risk in the last year? That accounts alone for about 50 bps

 

[born2b]

It would be wrong to measure the market as efficent / inefficient…
I reckon the market is never fully efficient, in fact its quite semi-efficient.
The correct question would be how efficent the market is. i.e how close it is to efficiency/inefficiency????
Offcourse not all markets are the same and efficiency measures are defferent across markets, sectors, industries and economies.