EMH ROUNDTABLE
Can EMH play a role in the regulation shareholders. But in general, the EMH
of fi nancial markets? What other
implies that markets function well on
THE PANEL
ideas and theories are relevant for
their own and that most regulation is
regulation of our fi nancial system?
likely to distort economic effi ciency.
Many regulations are based upon the
BROWN – Th ere have been many failures assumption that investors need help and
of our regulatory system, although I are unable to or cannot make rational
ALAN BROWN, FSIP
don’t think EMH plays much of a part decisions. Th ey assume market prices can
Group chief investment offi cer,
Schroders
other than the assumption that all be manipulated (so restrict short selling) or
Alan Brown joined Schroders
participants are rational and are seeking investors are naive (give them a prospectus
and its board in July 2005 after
to maximise risk-adjusted returns looks a warning them of risks). Th e more
spells at Morgan Grenfell,
bit of a stretch. distortions there are from the actions of
Posthorn Global Asset
Management, PanAgora Asset
We see seven basic failings, six of irrational investors who do the wrong
Management and State Street
which have had a direct bearing on the things, the more regulation we need.
Global Advisors. He is chairman
credit crisis: a failure to lean against the Effi cient markets do not explain
of the advisory council of the
CFA Centre for Financial
pro-cyclicality of banks; an over- everything and we may need to protect Market Integrity, chairman and
dependence on a single risk model, value people somewhat against their own
treasurer of the Centre for
at risk (VaR), and a failure to properly actions. However, it’s diffi cult to be
Economic Research and
Graduate Education –
account for systemic contagion risks; a systematic about this. Th e basic theory Economics Institute, a member
failure to properly control agency risks; a of regulation is to protect people against
of the MSCI Barra editorial
advisory board and a
failure to regulate entities which carried themselves. Th e effi cient market
non-executive director of Pool
out bank, broker or asset-management hypothesis is the opposite of that.
Re and the Carbon Disclosure
type activities but which were increasingly
Project.
off balance sheet (SIVs and conduits, for BERNSTEIN – Re the fi rst question, I
example); a failure to recognise the risks doubt it. Th e role of fi nancial regulation
of asymmetric rewards to both is twofold: fi rst, to prevent outright
ROGER IBBOTSON
shareholders and management; a failure fraud and malfeasance; and second, to
Founder, Ibbotson Associates
to pay suffi cient attention to the confl icts prevent systemic instability. We’ve done Roger Ibbotson is the former
of interest and fl awed business model of a fair job on the former count, and a
chairman and founder of fi nancial
research and information company,
the rating agencies; and fi nally, although truly awful job on the latter. Th is is what
Ibbotson Associates. He is a the
not directly related to the credit crisis, the I fi nd so depressing about our current
chairman, founder, and CIO of
continuance of legal, but unethical predicament. As late as the 1970s, there
Zebra Capital. He is also professor
of fi nance at Yale School of
business practices in the fi nancial services were still policy makers and other Management and co-authors the
industry. informed observers around who in their
yearbook Stocks, Bonds, Bills and
youth had been made acutely aware of
Infl ation.
IBBOTSON – Essentially, free markets rely the propensity of completely unfettered
on the notion of effi cient market fi nancial markets to cause great damage.
hypothesis. If markets are effi cient then By the 1980s and 1990s, those wise old WILLIAM J BERNSTEIN
we don’t need much regulation, though heads had disappeared from the scene,
Co-founder of Effi cient
Frontier Advisors
we would still require transparency so that and the brakes were removed. I’m very
information gets disseminated. We would afraid that this may be a recurring
William J Bernstein is a fi nancial
want markets to function with as few pattern—that is, a built-in historical
theorist and co-founder of
Effi cient Frontier Advisors, an
frictions as possible. We would want amnesia that mandates having to investment-advisory fi rm. He has
eff ective corporate governance, so that periodically, and painfully, remember the
conducted research in modern
portfolio theory and has written a
management works in the interest of lessons of 1907, 1929, and 2008.
number of investing and
economic history books
including The Intelligent Asset
“The basic theory of regulation is to protect
Allocator and A Splendid
Exchange: How Trade Shaped the
World. He practised medicine for
people against themselves. The effi cient market
25 years and is an associate
clinical professor of neurology.
hypothesis is the opposite of that” IBBOTSON
WWW.CFAUK.ORG PROFESSIONAL INVESTOR 19
17-1917-19 roundtable.indd 19roundtable.indd 19 1/6/091/6/09 12:36:0212:36:02Professional Investor Summer 09.21 21 4/6/09 15:40:51
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