An Exploration of Neo-Austrian Theory Applied to Financial Markets


  • Harald Benink,

  • Peter Bossaerts

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    • Harald Benink is from the Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands. Peter Bossaerts is from the California Institute of Technology and Center for Economic Policy Research. This paper is based on an earlier one written by the second author, entitled “Time Series Analysis Of Inefficient Financial Markets.” That paper benefited from comments during seminars at the University of New South Wales (Australia), at LIFE of Maastricht University (The Netherlands), and at the Weierstrass Institute of the Humboldt Universität (Germany). Many thanks to Israel Kirzner, Harald Uhlig, the editor and an anonymous referee for comments and criticism.


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.