Three “Failures” in Financial Markets
“Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital” – Aaron Levenstein
On the 29 of March 1900 at the Sorbonne in Paris a young Ph.D. student was defending his doctoral dissertation titled “The Theory of Speculation”. It was a mathematical treatment of the observed fluctuations of French government bonds and their options. The main conclusions of the study were that:
- there are no discernible trends in the market
- the market has absolutely no memory of what it has done in the past
- the difference of the logged returns are normally distributed
To this date these results still stand as the null hypothesis of modern finance and economics.
