Discussion and Applications

Abstract

Paul Samuelson’s result that prices follow a random walk buffeted only by random and unknowable forces once arbitrage has extracted value from every last bit of price disparity clearly created a school of its own, and perhaps even a faith, among financial theorists. Believers have constructed myriad reasons why it must be true as a matter of faith. Still others believe that markets are not as perfect as the arbitrage proponents insist. Both can cite many examples and scenarios to “prove” their case. However, their protestations seem to do little but preach to the converted and seem to have little effect on changing the minds of the skeptics.