Noisy Market Hypothesis

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Jeremy J. Siegel, author of Stocks for the Long Run, is also the promulgator of the Noisy Market Hypothesis. Siegel explains the hypothesis[1] thus:

This new paradigm claims that the prices of securities are not always the best estimate of the true underlying value of the firm. It argues that prices can be influenced by speculators and momentum traders, as well as by insiders and institutions that often buy and sell stocks for reasons unrelated to fundamental value, such as for diversification, liquidity and taxes. In other words, prices of securities are subject to temporary shocks that I call "noise" that obscures their true value. These temporary shocks may last for days or for years, and their unpredictability makes it difficult to design a trading strategy that consistently produces superior returns. To distinguish this paradigm from the reigning efficient market hypothesis, I call it the "noisy market hypothesis.

— Jeremy J. Siegel, The Noisy Market' Hypothesis, Wall Street Journal, June 14, 2006.

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