A new theory suggests that day-to-day trading has lasting effects on stockmarkets

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ECONOMICS IS ABOUT supply and demand—just not in financial markets. A building block of asset-pricing theory is that the value of stocks and bonds is determined by their expected future payoffs rather than by ignorant trades. If an investor unthinkingly throws money at, say, shares in Apple, opportunistic short-sellers are supposed to line up to take the other side of the bet, keeping the share price anchored to where it ought to be, given Apple’s likely profits. Free money gets picked up and dumb money gets picked off. Markets are efficient, in that prices come to reflect genuine information about the future.

At this point your columnist may be in danger of provoking guffaws. It has been a bad year for the textbooks. Retail investors have driven up the prices of meme stocks such as GameStop and AMC. Cryptocurrencies, the fundamentals of which cannot easily be analysed, have soared too. Even America’s bond market is a puzzle: the…

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