An NYU Poly Department of Finance and Risk Engineering professor has a forthcoming paper in Algorithmic Finance that claims that “Markets are efficient if and only if P = NP.”

Why is this important? Most economists think markets are at least weakly efficient (I disagree).

Computer scientists think that P != NP — that current prices fully reflect all information available in past prices.

This paper claims they both cannot be correct; one must be incorrect. The author’s proof is that they both cannot be correct at the same time, and therefore one must be wrong.

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Abstract:

I prove that if markets are efficient, meaning current prices fully reflect all information available in past prices, then P = NP, meaning every computational problem whose solution can be verified in polynomial time can also be solved in polynomial time. I also prove the converse by showing how we can “program” the market to solve NP-complete problems. Since P probably does not equal NP, markets are probably not efficient. Specifically, markets become increasingly inefficient as the time series lengthens or becomes more frequent. An illustration by way of partitioning the excess returns to momentum strategies based on data availability confirms this prediction.

Category: Quantitative, Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

8 Responses to “Markets are Efficient If (and Only If) P = NP”

  1. jdollinger says:

    More interestingly the various examples of violations of weak form EMH suggest that P NP

  2. jdollinger says:

    that should have read P NP sorry

  3. jdollinger says:

    P does not equal NP apparently wordpress doesn’t like greater than and less than symbols

  4. Veneziano says:

    Economics is the only discipline I know of that can “Prove,” via math models powered by hopelessly unrealistic assumptions, that reality doesn’t exist.

  5. [...] Markets are efficient only if P=NP.  (SSRN via Big Picture) [...]

  6. tagyoureit says:

    Whatever you do, DON’T look in the box.

  7. yuvalw says:

    Markets are effective, not efficient.

  8. Greg0658 says:

    wars are effective in righting inefficient markets .. (absense newborns with the right stuff) .. an expanding population provides capitalism it’s fix