‘The two quantifications of financial theory: a toy model’ by Christian Walter

Christian Walter (FMSH, Paris)

I present without mathematical complexity a toy model of the well-known and celebrated Efficient Market Hypothesis (EMH). This toy EMH-model aims to illuminate the correspondences between the multiple representations of EMH-models with a focus on the two main mathematical frameworks of EMH: the mean-variance universe of Markowitz (1952) under the “real world” probability P and the martingale pricing universe of Harrison and Kreps (1979) and Harrison and Pliska (1981) under the “risk-neutral” probability Q. These two mathematical frameworks have been characterised in Chiapello and Walter (2016) as two quantification conventions. My toy EMH-model expands and elaborates on the previous article by adding to it a simplified integrated approach to these two conventions, and linking them to general equilibrium theory. One epistemic gain of this toy EMH-model is that it easily captures one of the most difficult conceptual aspects of the EMH, saying the uniqueness of the risk-neutral probability Qin a complete arbitrage-free market.

My ambitiously stated proposal is that the epistemic goal of my toy EMH-model is to enable social scientists, financial practitioners and non-specialists of stochastic calculus to understand some of the epistemic difficulties of the EMH, namely the intertwin between the P-world and the Q-world. In that sense, the proposed toy EMH-model is epistemically valuable and pedagogically useful.

The meeting will be followed by an open debate.

17:30 CET, 23 March 2023



Christian Walter
(FMSH, Paris)


Chair Emiliano Ippoliti, Sapienza University of Rome

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