Professional Investor

“I am not a strong believer in market
current price does not refl ect the asset’s
future performance, that is also
effi ciency as such. I am simply suggesting that
consistent with the EMH, which
requires only the best possible estimate
the crisis should not change anybody’s view
or forecast of future performance that
can be made with publicly-available
information. Th at estimate may still be
about whether the EMH is viable or not” SARNO grossly wrong without violating the
EMH. Th e current crisis is characterised
capital is equally high in both camps MPC, one is fl own in from the US! If one by vastly noisy information, and
but, while the need for routine risk does not have the institutions that uncertainty today is as high as it has
assessment dominates the daily life of promote interaction, so that academics ever been in the post-war period. Let
practical risk management, academics are working alongside policy makers on a me make clear that I am not a strong
have the luxury of time to solve day-to-day basis, then it is unlikely that believer in market eﬃ ciency as such. I
problems that risk managers often do academics will be in a position to take an am simply suggesting that the crisis
not. Th is requires more interaction active role during a crisis. should not change anybody’s view about
between academics and the industry to whether the EMH is viable or not.
ensure academics are working on the SATCHELL – Risk management has long
most relevant problems over time. I been to asset pricing and corporate SEFTON – Th e EMH (as embodied by
would like to see more research centres fi nance what Igor was to Dr Frankenstein. CAPM) will remain the benchmark
in asset management that comprise a Igor would have to be described as model. As John Cochrane put it,
mix of practitioners and academics. back-oﬃ ce, along with risk management. ‘Would that all failed economic theories
Whilst necessary for the overall practice, worked so well!’ Th e market is
SEFTON – On this question, I have a it’s a low-status activity unlikely to lead to reasonably eﬃ cient as evidenced by how
strong opinion. In the US, academics bonuses or publications in top journals. It diﬃ cult it is for skilled managers to
are, and have been, at the centre of the would be nice to think that this will consistently beat it. Even Warren Buﬀ et
policy process. Obama’s administration change but I suspect it may not. It lost a lot of money last year.
is full of world class academics; Larry would be interesting to read some However, it is apparent that the strong
Summers, Christina Romer, Jeremy fi nancial sociology to understand more assumptions of the Capital Asset Pricing
Stein, Ben Bernanke, Austan Goolsbee as to why risk management is never Model are violated – making it perhaps
etc. In the UK, this is just not the case given its appropriate recognition. Alas, more surprising that it performs so well
(except possibly for a very few what is true in industry seems to be true against the data. Clearly transactions costs
exceptions). Academics are sidelined in in academia; top journals don’t fi nd risk are non-negligible, many investors face
the policy process taking only periphery management interesting. investment constraints and investors
advisory roles. Why? certainly diﬀ er widely about their
One of the principal reasons has to do expectations of the future. Further it is
with the way our respective institutions TAPLEY – Is the EMH still viable? If clear that money management is delegated
are organised. In the US, academics are not, what will replace it? to managers whose incentives are very
included in (and in this current poorly captured by a mean-variance
administration head) both the National SARNO – I view the EMH as a useful criterion. Relaxing these constraints is
Economic Council (NEC) and the benchmark to think about valuation. I likely to have a major impact on the
Council of Economic Advisors (CEA). am not sure that recent events in predictions of these models. My intuition
Both councils are part of the Executive fi nancial markets suggest anything about is that this is likely to be a more fruitful
Oﬃ ce of the President. Th en of the 12 the EMH, and I fi nd the press often avenue for research than assuming
Federal Reserve Banks, seven have large confused on the link between the EMH investors’ decisions exhibit consistent
research departments which include many and the crisis. Simply put, the EMH psychological biases.
notable academics as members. In states that an asset price is obtained by
contrast, only the MPC in the UK could aggregating the probabilities of all future
be regarded as having respectable outcomes that are relevant for that asset, TAPLEY – Where are the new
academic links – both the governor and based on the best information available directions of fi nancial theory?
his deputy were previously LSE at the time. Whether that information
professors. Even so, of the two turns out to be correct is not something SARNO – I think that the growing body of
independent academics sitting on the required by the EMH. And if the asset’s research into market microstructure is
8 SUMMER 2009
08-1108-11 academic roundtable.indd 8academic roundtable.indd 8 1/6/091/6/09 11:25:3811:25:38Professional Investor Summer 09.10 10 4/6/09 15:40:43
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