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Nobels for nonsense

Author

Listed:
  • James Thompson
  • L. Baggett
  • William Wojciechowski
  • Edward Williams

Abstract

We apply exploratory data analysis to some of the basic models of neoclassical computational finance. These include the portfolio selection algorithm of Markowitz, the capital market line of Sharpe, and the option pricing model of Black-Scholes-Merton. We demonstrate that the Markowitzian assumption of positive correlation of expected return and volatility is not supported by the data. The notion that an index fund based on market cap weighting is optimal is also shown to be inconsistent with market data. It is noted that the option pricing model of Black-Scholes-Merton is not supported by market history. The SIMUGRAM™, an empirical data-based paradigm for portfolio selection, is discussed. It is observed that some of the basic contemporary strategies of neoclassical computational finance may be seriously flawed and might profitably be replaced by data-based rules. We conclude that several Nobel Prizes in economics have been awarded for nonsense.

Suggested Citation

  • James Thompson & L. Baggett & William Wojciechowski & Edward Williams, 2006. "Nobels for nonsense," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 29(1), pages 3-18.
    • Handle: RePEc:mes:postke:v:29:y:2006:i:1:p:3-18
    DOI: 10.2753/PKE0160-3477290101
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    Cited by:

    1. Philip Ernst & James Thompson & Yinsen Miao, 2016. "Portfolio Selection: The Power of Equal Weight," Papers 1602.00782, arXiv.org, revised Aug 2017.
    2. Henryk Gzyl & Alfredo Rios, 2018. "Which portfolio is better? A discussion of several possible comparison criteria," Papers 1805.06345, arXiv.org, revised Jun 2022.

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