> 95% of what you have done is quote people, which is not evidence of
> the character of the EMH. You have to discuss the actual EMF.
I quoted two of its main exponents, Fama and Scholes, defending the validity of the hypothesis (the EMH) that participants in financial markets can and do form rational expectations of all future phenomena relevant to present valuations so that present prices always embody this knowledge by pointing to evidence that participants don't do this (i.e. by pointing to evidence demonstrating that the hypothesis is false).
I also pointed again to a study by MacKenzie and Millo demonstrating the role of the EMH in the development, functioning and explosive growth of financial derivative markets, that role (the widespread use of formulae based on the EMH in the valuation of options, CDOs and CDSs) itself falsifying the EMH, i.e. falsifying the hypothesis that such valuations can be and are based on rationally formed expectations of all future phenomena relevant to them.
I quoted from that study a trader, Mathew L. Gladstein, reporting Scholes and Merton claiming, when confronted with the fact that option prices (i.e. the prices their formula assumed were "efficient") were very different from the prices predicted by the formula, that it was the prices that were wrong. The trader then took this to mean that the formula made it possible to know better than the market what future prices would be, i.e. took it to mean that a formula based on the hypothesis that it was impossible to know better than the market what future prices would be made it possible to know better than the market what future prices would be.
"The first day that the Exchange opened . . . I looked at the prices of calls and I looked at the model and the calls were maybe 30–40% overvalued! And I called Myron [Scholes] in a panic and said, “Your model is a joke,” and he said, “Give me the prices,” and he went back and he huddled with Merton and he came back. He says, “The model’s right.” And I ran down the hall . . . and I said, “Give me more money and we’re going to have a killing ground here.”(Gladstein interview)’” p. 121
I also pointed again to the role played by David Li's "Gaussian copula function" for measuring the risk of default correlation, a function also derived from the EMH, in facilitating the explosive growth of mortgage backed securities and credit default swaps by hiding not only "uncertainty" in Keynes's sense, but the practical certainty of default on many of these securities.
Ted