An Exploration of Neo‐Austrian Theory Applied to Financial Markets

Abstract

We attempt to translate Neo-Austrian ideas about the workings of financial markets, as originally advanced by F. A. Hayek, into the standard probabilistic language of modern finance. We focus on an apparent paradox, namely the insistence of Neo-Austrians on order~i.e., stationarity! together with ever-reemerging inefficiencies. The paper's findings have implications beyond Neo-Austrian theory: They demonstrate how easy it is to reject market efficiency, but how much more difficult it is to discern the nature of the inefficiency. We illustrate our findings with price data from the U.S. Treasury bill market over the period 1962 to 1999. There is ample evidence that the price of a three-month Treasury bill is not a random walk, yet the sign of the average price change is erratic, so that inference about the nature of the inefficiency is unreliable.

The Design of Financial Systems: Towards a Synthesis of Function and Structure

“…28 See Coval and Thaker (forthcoming) for a prime demonstration with a formal model of the role of institutionally rational intermediaries in bridging the dysfunctional behavior between irrationally optimistic individual entrepreneurs and irrationally pessimistic individual investors. 29 For an alternative, "Neo-Austrian" view of the dynamic adjustment process in which asset prices tend to move toward an inefficient but stable equilibrium, see Benink and Bossaerts (2001) and Benink et al (2004). 30 See for examples, Coval and Moskowitz (1999), Cronqvist and Thaler (2004), Hong, Kubik, and Stein (2004), Huberman (1999) and Lewis (1998).…”

Empirical regularities from interacting long- and short-memory investors in an agent-based stock market

“…16 Although markets are predictable according to normal tests of significance, the best predictors may be changing over time. 17 16 See [30] and [31] for similar theoretical questions related to stationarity. 17 Some caution should be used in interpreting these t-statistics since there is some possibility for data snooping here and one would naturally expect the t-statistics to change purely by chance.…”

The Equilibrating and Disequilibrating Effects of Entrepreneurship: Revisiting the Central Premises

“…However, the more realistic assumptions have come at the expense of formal analyzability. Thus, the Austrian school has traditionally shown resistance to formal mathematical modeling (Littlechild, ; Rothbard, ), even though this insistence has lessened in recent years (Benink and Bossaerts, ; Benink et al ., ; Fillieule, ; Fusari, ; Littlechild, , ).…”