READING FINANCIAL MARKETS

Reading Financial Markets

Table of Contents

Reading Financial Markets4

Introduction4

Financial Discourse5

What is a Theory of Financial Markets or Security Prices?6

Oppositions7

Methodology11

Literature Review13

Markets13

"Technical" Narratives14

Traditional "Macro" Narratives16

A Rational Expectations Narrative18

Reflexive Narratives21

Structuralism23

"Structure": Saussure and Lévi-Strauss24

Structuralism and Markets26

The Old Trader and the Yen28

Oppositions Revisited30

Findings35

Post Keynesian Economics and Mathematics35

Conclusion and Recommendations42

Practical Implications43

References52

Reading Financial Markets

Introduction

As an academic activity, the study of financial markets seems to draw from many disciplines-from mathematics to psychology, economics to sociology-and draws on them in ways that are frequently, in fact, typically, inconsistent with each other. In the markets, one observes an even more bewildering variety of interpretations, almost as many interpretations as there are traders in the market. Everyone is at the mercy of capricious fluctuations in prices, and the response is an obsessive generation of explanations and conceptual frameworks, from the most narrow and rigorously quantitative theories to constructions that are fantastically complex and eclectic to the point of incoherence. And, somehow, everything and nothing seems to work: more precisely, everything works for someone, and nothing works for everyone.

What does all this mean? Where do theories of markets come from, and how do they function in the lives of traders and the day-to-day activities of markets? Is there a meta-theory (i.e., a method of evaluating theories) of markets that could explain this proliferation of theories, their interrelationships, and their conflicts? In what way could such a meta-theory possibly be firmly grounded? And, could it possibly have any practical implications? There are tools, drawn from the literature of structuralism and post-structuralism, that may help us grasp the structure and dynamics of this web of interpretations.

This paper takes some first steps along this path. For the benefit of readers whose background is purely financial economic theory, a great deal of introductory material has been included-an introduction to some aspects of structuralism and post-structuralism, and also an overview of various kinds of explanations in circulation in financial markets.

Financial Discourse

The emphasis of the exposition in this section will be on theories as forms of discourse, or as contributing elements to discourse, rather than theories as truth-generating logical machines. In fact, the term interpretive framework might be more appropriate than theory. The analysis we proffer is not so much about theories in competition with each other, as it is about interpretive frameworks interacting with each other; it is not so much interested in making judgments about the correctness of specific theories, as in understanding what market participants are doing in the continual process of generating and deploying interpretations.

Discourse on markets is carried on at various levels: at the level of price information alone; of information on economic facts external to the market; of information on the psychological state of market participants; and at a reflexive level, about the nature of discourse itself. Various theories may therefore address all these levels, and indeed switch back and forth between these levels.

What is a Theory of Financial Markets or Security Prices?

Before diving in, though, a precautionary observation is called for. What is a theory of financial markets or of security prices? ...