Why EMH is flawed: it relies on Probability Theory which CAN'T DEFINE Randomness

[mujotrader]

harrytrader wrote:

Martingale is not incompatible with Markov Property, the trivial example being that a brownian motion satifies both. So it is not a criteria to distinguish EMH from TA. The very reason why martingale has been introduced in financial theory by Samuelson - who receives the Nobel Prize for that - is that it imposes no autocorrelation (independancy) condition on the residuals which was too restrictive in RMH (Random Market Hypothesis).

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Quote from mujotrader:

As noted before, in terms of random processes, the issue
of randomness is: is a market a Martingale (EMH) or
multidimensional Markov (non-EMH, the type a TA would work)
process. Whether EMH is flawed or not has nothing to do with it
being based on Probability.
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I assume Random Market Hypothesis is the same as Random Walk Hypothesis (that is what it is referred to in the literature).

In any case remember a random walk is a markov chain, but not all markov chains are random walks. This is why Technical Analysis
maps to (multidimensional ) Markov random processes that are not simple random walk processes.







__________________

 

[harrytrader]

I don't know if you consulted the answer I gave you to another thread since you asked if there was a difference in litterature between RMH and EMH
http://www.elitetrader.com/vb/showthread.php?s=&threadid=25864&perpage=6&highlight=rmh&pagenumber=2

http://www.e-m-h.org/random_walk.html
"with the benefit of hindsight and the theoretical insights of LeRoy (1973) and Lucas (1973), it is now clear that efficient markets and the random walk hypothesis are two distinct ideas"

Saying that Technical Analysis
maps to (multidimensional ) Markov random processes that are not simple random walk processes once again doesn't distinguish from today's EMH which uses also these markov chains and don't restrict them to being random walk since at least Samuelson. Random Walk is dated from Bachelier at the beginning of 20th century whereas "modern" EMH which doesn't lie on random walk is dated from Samuelson in the 1970 : he didn't receive the Nobel Prize for random walk of course but for his martingale theory applied to financial market. Fama, one of the so-called Chicago School like Samuelson and who popularize the 3 different forms of EMH, dictates the "official" theory of finance notably to regulators, clearly reaffirms EMH predominance in his article where he says: "efficient market hypothesis dominated financial theory for more than 30 years" and continues to do so since there is no rigorous proof from other schools above all from TA (remember that CFTC even considered that TA is probably charlatanism) - as I pointed already:
http://www.econometric-wave.com/home/home.html.html

Quote from mujotrader:




I assume Random Market Hypothesis is the same as Random Walk Hypothesis (that is what it is referred to in the literature).

In any case remember a random walk is a markov chain, but not all markov chains are random walks. This is why Technical Analysis
maps to (multidimensional ) Markov random processes that are not simple random walk processes.







__________________

 

[mujotrader]

harrytrader wrote:

I don't know if you consulted the answer I gave you to another thread since you asked if there was a difference in litterature between RMH and EMH ideas

My question was the difference between what you were calling RMH and RWH.

Saying that Technical Analysis
maps to (multidimensional ) Markov random processes that are not simple random walk processes once again doesn't distinguish from today's EMH which uses also these markov chains and don't restrict them to being random walk since at least Samuelson.

So what TA is not Markov (or perhaps modelled as a Hidden Markov Model)? I could model some 3-step candlestick processes (let the states be [0,C,H,L] tuples) as third-order Markov chains for example.