10 Chasing a Chimera?
The role of the efficient market hypothesis
In previous chapters, the focus was on the various methodologies for determining value, noting the disadvantages in some of the important and relevant methods used. They often involved complex mathematical models in an environment in which it was believed that it was possible to find certainty. The efficient market hypothesis (EMH) prevailed. Capital markets are efficient, because competition between profit-seeking market participants will ensure that the
firm required to protect it against various risks augmented by capital requirements due to external constraints) and risk limits. The presentation then set out the familiar techniques used to assess risks and losses, such as value-at-risk (VaR), a measure of market risk, which is expressed as the ‘maximum amount that can be expected to be lost with a certain degree of certainty over a given time horizon’. 29 Other risks that were carefully considered included event risk, in which Lehman claimed to measure stress, and ‘gap risks’ which go beyond potential market risk
enables one to simulate the behaviour of a system as it is modelled and then simply observe the results … The key to successfully using Monte Carlo simulation techniques is one of performing enough trials to capture long-term certainty … 30 seconds for 15,000 trials on a portfolio of 100 assets and 2.5 minutes for 100,000 trials on the same portfolio. 20
The speed was extremely important, as so many CDOs based on mortgages were being issued that a method of valuation which bypassed
economic recovery, lower
inﬂation, smaller declines in employment and inﬂation-adjusted wages and
a more rapid turnaround in the stock market.
There is no doubt that the controls did provide a measure of certainty at
a time of unprecedented ﬁnancial turbulence. The reduction of the ringgit’s
internationalization and the elimination of most potential sources of access
to ringgit by non-residents effectively eliminated the offshore ringgit market. For example, the offshore bank in Singapore had to dispense with the
ringgit, thereby eliminating external restrictions on the