A Random Walk to Nowhere: How the Professors Caused a Real "Fraud-on-the-Market"

197 Pages·2020·7.571 MB·English

by  Edward E Williams, John A Dobelman

A Random Walk
to
Nowhere
How the Professors Caused a
Real “Fraud-on-the-Market”
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A Random Walk
to
Nowhere
How the Professors Caused a
Real “Fraud-on-the-Market”
Edward E. Williams
John A. Dobelman
Rice University, USA
World Scientific
NEW JERSEY • LONDON • SINGAPORE • BEIJING • SHANGHAI • HONG KONG • TAIPEI • CHENNAI • TOKYO
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Published by
World Scientific Publishing Co. Pte. Ltd.
5 Toh Tuck Link, Singapore 596224
USA office: 27 Warren Street, Suite 401-402, Hackensack, NJ 07601
UK office: 57 Shelton Street, Covent Garden, London WC2H 9HE
Library of Congress Cataloging-in-Publication Data
Names: Williams, Edward E, author. | Dobelman, John A, author.
Title: A random walk to nowhere : how the professors caused a real
“fraud-on-the-market” / Edward E Williams, John A Dobelman,
Rice University USA.
Description: Singapore ; Hackensack, NJ : World Scientific Publishing, [2020] |
Includes bibliographical references and index.
Identifiers: LCCN 2019042755 | ISBN 9789811207785 (hardcover) |
ISBN 9789811208355 (paperback)
Subjects: LCSH: Efficient market theory--Statistical methods. | Efficient
market theory--Mathematical models. | Random walks (Mathematics)
Classification: LCC HG4915 .W55 2020 | DDC 332.01/5195--dc23
LC record available at https://lccn.loc.gov/2019042755
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library.
Copyright © 2020 by World Scientific Publishing Co. Pte. Ltd.
All rights reserved. This book, or parts thereof, may not be reproduced in any form
or by any means, electronic or mechanical, including photocopying, recording or
any information storage and retrieval system now known or to be invented, without
written permission from the publisher.
For photocopying of material in this volume, please pay a copying fee through
the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923,
USA. In this case permission to photocopy is not required from the publisher.
For any available supplementary material, please visit
https://www.worldscientific.com/worldscibooks/10.1142/11484#t=suppl
Desk Editor: Shreya Gopi
Typeset by Stallion Press
Email: [email protected]
Printed in Singapore
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This book is dedicated to the everlasting
memory of
M. C. Findlay, III, Ph.D.
1944–2008
and
Edward E. Williams, Ph.D.
1945–2018
v
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Contents
Preface ix
About the Authors xvii
Chapter 1 Fraud, Lies, and Statistics 1
Chapter 2 The Early History of Modern
Financial Economics 17
Chapter 3 The Birth of the Efficient
Market Hypothesis 39
Chapter 4 Earlier Views of Market Efficiency 53
Chapter 5 The Impact of Information and
Regulation on Market Efficiency 73
Chapter 6 Tests of the EMH 95
Chapter 7 Anomalies 115
Chapter 8 The Capital Asset Pricing Model 131
vii
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viii A Random Walk to Nowhere
Chapter 9 Beyond the CAPM 137
Chapter 10 Conclusions 161
Bibliography 165
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Preface
This book is about an intellectual fraud. The fraud
started out as an honest attempt to improve our
insights on how financial markets work, but it eventu-
ally became almost a religion that every financial econ-
omist had to buy into or risk professional crucifixion.
More importantly, the fraud has become a part of the
legal opinion that has greatly influenced decisions all
the way up to the United States Supreme Court. These
decisions have real consequences and it is almost a cer-
tainty that the judges and justices who have relied on
this “fraud” have no idea that their opinions have little
basis in economic fact. The fraud we are describing
goes by the name “the efficient market hypothesis”
(or EMH). The origins of the EMH began over
50 years ago and it came to dominate research in the
academic financial community for decades. In addition
to the courts, the hypothesis has been widely read and
considered by professional portfolio managers and
every day investors. It has even been claimed to be
the intellectual foundation of the development of the
ix
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