From: John Conover <john@email.johncon.com>
Subject: Re: Mahathir's Phobia of Speculators
Date: 19 Apr 1999 19:56:59 -0000
John Conover writes:
>
> As an unrelated side note, in the reference he also argues that
> fractal Brownian motion is an inadequate model for financial
> instrument prices unless the market is very inefficient, which is
> contradictory with the paradigm of the Efficient Market Hypothesis,
> (EMH,) which assumes that all information available in the market is
> already reflected in a financial instrument's price-ie., the Hurst
> exponent is exactly 0.5, meaning a fractal Brownian motion model,
> which is efficient.
>
The mathematician John L. Casti[1] offers a very interesting paradox
on the EMH, (paraphrasing):
There is something inherently paradoxical about the EMH. On the
one hand, the EMH says that it's useless to gather information; it
will do one no good at all in the development of a trading
strategy that will outperform the market. On the other hand, the
EMH says that all available information has already been factored
into the price of a stock. But how can this happen if no one
gathers information? The fact is, it can't. Therefore, in order
for the EMH to be valid, there must be a sufficiently large number
of traders who don't belive it! So it can only be true if you
don't think its true-a stock market version of the famous Liar's
Paradox, ("All Cretans are liars. I am a Cretan. I'm Lying".)
It is interesting since it would seem to imply that the paradigm of
the EMH is inherently constructed with logical inconsistencies. (Not
to mention what it does to the concept of rational investors under
such circumstances, too.)
John
[1] "Searching for Certainty", John L. Casti, William Morrow, New
York, New York, 1990, ISBN 0-688-08980-1, pp. 204.
--
John Conover, john@email.johncon.com, http://www.johncon.com/