The paper "On the Impossibility of Informationally Efficient Markets" By SANFORD J. GROSSMAN and JOSEPH E. STIGLITZ is Wrong.

The paper introduces a so-called paradox wherein perfectly informationally efficient markets are an impossibility given that prices perfectly reflect available information and thus, there would be no profit to gathering information that results in a total collapse of the market owing to the fact that there is no incentive to trade. 

A simple argument on why the paper is wrong is given by the fact that there is no time consideration in the model. The model is time free and thus it is not known if it is specified in the current or the past states. Three times the term "time" is mentioned in the paper. There is obfuscated time recognition in "If over time uninformed traders observe many realizations of (u*,Px*), then they learn the joint distribution of (u*, P*). After all learning about the joint distribution of (u*,P,*) ceases, all traders will make allocations and form expectations such that this joint distribution persists over time."

Therefore, as it is shown the model assumes a time explicitly which is a deadly mistake since the time is implicit in all trading s and necessary to establish market equilibrium. It can be inferred from the model that in one-period setting all the available information manifestes in the price and for the renewed time episodes the equilibrium repeats itself. Therefore, the model that authors present provides a solid argument for informationally efficient markets not the other way around.  Which brings us to the third mentioning of the term "time" in the paper ""Efficient Markets" theorists have claimed that "at any time prices fully reflect all available information" (see Eugene Fama, p. 383)."

Forming a Zero Return portfolio and destruction of Markowitz risk-return framework.  

To form a zero return portfolio we get the help from already constructed hedged portfolio of Fama-French. I add High minus low hedge portfolio with Low minus High hedge portfolio to arrive at zero return portfolio such that

(High - Low) + (Low - High) = 0 

Now the question is wherre does this portfolio resides in the return-risk plane of Markowitz. Apparantly, the portfolio has zero return so it is zero on the return dimension. The portfolio is not zero for risk since there are some risk involved in the making of the portfolio owing to the restrictions imposed by the market friction. Therefore, the suggested positioning of the portfolio is at zero return and non-zero at risk which put a line on the risk axis. A point that is altogather ignored by the Markowitz framework. 

Double hedging and infinite hedging strategies.

What happens if we apply a double hedging strategy to an already hedge portfolio. For example, consider High minus Low portfolio in Fama-French fashion. What if we go long on High minus Low and Short Low minus High. It is emperically fully possible to do that. Lets see.

(High - Low) - (Low - High) = High - Low - Low + High = 2(High - Low)

As you can see we have a linear magnification by a factor of 2 on the outcome of the strategy.  Now, lets repeat this strategy infinite time for the sake of argument. We are left with Infinite (High - Low) which is not plusible or is it. 

Innovation.

Innovation is a nonzero change in the way we live. The life force contains stationery and innovation parts. Innovation occurs through time. When we differentiate two time stamps namely, the past and realized past independent of the juxtaposition between the two, we observe a zero changes and nonzero changes. The zero change part constructs a stationary part and nonzero part entails innovation per se. The stationary part remains in the realm of unchanged. Innovation is the change brought about by the way we live in a new way.

Innovation contains three parts, the mean addition part, the mean revolution part, and the white noise. The mean addition part resonates with the universal mean such that there is no difference in the new part added and the previous global mean. In a sense the mean addition part is the changes in the way we live in the new way that the universal mean observable by other parties is not moved but reemphasized. This entails a simple neutralized arithmetic of addition. The addition to the mean part plays a significant role in forming a new mean state variable. It fortifies the already global mean in place. Therefore, the new mean state variable formed have similar characteristic compared to previous global mean. The mean revolution part revolutionizes the global mean. All involved beings agree on the magnitude of the shock and this function approves the impact of the mean revolution part. In a sense, if the revolution in the global mean is sufficiently big, as perceived by all parties, it forms a new global mean. The white nose does not affect the global mean and mean revolution components of innovation and in this sense is neutral. The existence of white noise is pertinent to the affirmative nature of the global mean and mean revolution. It fortifies the global mean by inducing question of its significance confiscated by other two parts of innovation. There is uncanny similarity between the mean dependent part and the white noise. Both variable glue the global mean in its current state.  

Innovation does not occure in the levels. Therefore, it is necessary to think in changes rather than level when encounter with innovation. The nature of the innovation dictates that it could correlate with the current states if the mean addition part is dominant force and weakly correlated with current state of affairs if the revolution part is dominant force. The white noise mushed the whole information contained in innovation and thus it is vital to tease out the white noise part in a precise manner. 

Arbitrage in science in presence of innovation.

Arbitrage in science is the act of publishing an already explored scientific idea in a way that it manifest itself into new scientific idea. The lack of knowledge of the totality of the science, silos of information mandated by diconnectedness ease up this sham process of concealment. It is of singular importance to note that the arbitrage in science is innovation it self. Whether it forms a new revolutenize global mean or not, depend on the all parties approval to its significance. There is a process for the arbitrage in science which is producing a scientific product and the event entails the publishment of this product. I call the process and event of arbitrage in science as sham in cloak. 

There is no way in thinking that arbitrage in science is useful and beneficial to the scientific body as a whole. It is all ridden with frictions and inefficiencies. How to detect and fend off this sham. I argue that an oracle type of guardian of the knowledge is necessary. This oracle umbrellas all the scientific publications by neutralizing the effect of the silos and the errors arising from limited knowledge of the scientific mind map of ideas. 

Innovation bad and innovation good.

Innovation can be bad and it can be good not at the same time since I discussed that innovation appeares in the time line as a result of differentiating two time stamps. 

Bad innovation erodes the improvement and good innovation boosts the improvement. So the improvement is the say holder in this process and event of innovation. How to circumvent bad innovation. First task is to detect the innovation and then define its value as good or bad. Bad innovation almost in all cases induces frictions in the process of immprovement. Introduces a shackle on the feet of improvement. Good innovation ease up the process and the event of improvement. 

Arbitrage in science is bad innovation while a new method to detect innovation white noise is considered as good innovation. It is immensely important to note that innovation by itself is alluring to all parties beings. Why. Because it is filled with life force that derive all beings parties. This alluring nature of innovation make it quite hard to mitigate bad innovation. Disagrement between parties which manifests by a lack of leadership in the valuing of innovation into good or bad, confiscation of the mean addition and mean revolutionization of the innovation by white noise are example of why it is hard to detect bad innivation. 

Disagrement between parties can be addressed by reverting to a leading body for innovation. This leading body can gauge the innovation and decide weather it is good or bad and guarantor its addition to the already in place pool of life force. 

Innovation is free.

All beings are endowed with innovation. The biggest fiasco of all time has been the notion that innovation is pricely. When we read, run, sleep, think, talk and more generally when we live we innovate. One must note that commercialization of innovation is the special case of innovation. We should not entrap by the notion of pricely commercialized innovation. Patent creation and licence production is a form of commercialized innovation. 

What are the benefit of adopting the notion of free innovation globally. For one thing it free up the rouh capacity to innovate. It induces a shock wave to all three components of innovation namely, mean adfdition, mean revolution, and white noise. 

On the optimisation of languages.

Language is alive. It follows from this common sense notion that you can optimize words and the language constructs.The free nature of language which is at ones disposal in abundant makes the optimizing process and event of the language free. However, as discussed in the nature of innovation to adopt the new optimized word by other parties, it requires a collective adherence to the the notion that the proposed word is in fact optimized. 

Example in below:

Word     optimized version

Mood        Sanmood

Shape        Shapan

Read          Radon

Speak        Pokan

Friend       Finan

....

On the conscious and unconscious dimensions of innovation.

Innovation is a whole. However, to organize our though we can divide the process and event of innovation into two conscious and unconscious dichotomy of innovation. One can consciously innovate meaning that the being intentionally conscious on the event and process of innovation. The new way in building a house, a new method of running, a new way of thinking, dispatching from bad habits are example of this type of innovation. However, we must not forget as far as we live we innovate. Our heart rythm and pattern of breathing is unique to us and none of the two repel be it in heart rythm or breathing are the same. 

Once we focus on the unconscious innovation it become conscious innovation. Therefore, our attention is the function that facilitate the travel between the two types of innovation. 

On the erroneous game theories.

All game theoretic framework without time dimension forms an infinite closed loop with no equilibrium. The time index is necessary to tell the current positioning of the players and the goal set by the theorem. The linkage between the players and the goal of the scheme is lost once we reduce the game to static no time dependent paradigm.  

A rabbit hole without memory is an infinite closed loop. Imagine a rabbit insearch of carrot which is in th middle of a maze. The rabbit should have a memory of where he is located and where he came from. At every step, the memory of the rabbit update as per the current and previous locations. Take the memory away and rabbit does not move since he does not know where he come from and where he is located. It is hard to imagine that he moves forward since he is lost in space and time. It forms a game theoretic setting that I call infinite closed loop. It is infinite since there are infinite possibilities of movement. It is closed since we define a maze with perfect solution. It is a loop since the rabbit goes back and force on where he was and where he is constantly with the difference that we do not have time so he does not even know the consept of constantly. 

Therefore, game theories without time index are doomed to infinite closed loop games and failing to acknowledge that is a deadly istake. 

On the impossibility of the ecosystem.

From Wikipedia on ecosystem "The term "ecosystem" was first used in 1935 in a publication by British ecologist Arthur Tansley. The term was coined by Arthur Roy Clapham, who came up with the word at Tansley's request.Tansley devised the concept to draw attention to the importance of transfers of materials between organisms and their environment."

The term ecosystem implies an echoing process in the system. This entails a closed set which information or any other lively force echoes within the system. This is wrong. All systems form an open set which is partially closed. This partial closedness is vital to the identity of the system and partially openness is necessary for the survival of the system. A closed system is not existent. 

I propose a correct term "dashedsystem". 

Mean addition form of innovation in the market.

Mean addition form of innovation happens when the new information portrayed by innovation resonates with the global mean and adhered by all parties as a fortifying force of innovation. In here, I present a very peculuar form of mean addition innovation namely, firm budget constraint. 

Investmentst + Dividendt - Net Debt issuancet - Net Equity issuancet = Cash flowt

This equation of budget constraint always satisfied. There is no mean revolution and no white noise. This equation represent a pure for of mean addition of innovation. 

The mystery is evident in the equation. When we consider each element of the equation by itself, we are facing with all three form of innovation namely mean addition, mean revolution, and white noise. Consider for example Investmentst in it there is all three sources of innovation but when we consider it as a variable in budget consider it only contains the mean addition form of innovation.

When consider this accounting identity one must note that mean revolution and white noise is not present in there. As per investments, all synergy induced by investment and its monetary value, the value of leadership, the value of cordination with all other investment in place, value of real option induced by investment and all other financial option introduced by investment and many other variable is not present in this equation. This equation merely reflect the monetary value of investment in rigid accounting reporting. 

Why usage of the word "loss" is inappropriate .

Unity in terminology is necessary for avoiding confution. I propose to ban the use of word "loss" altogather. Why. Because it obfuscates the intention of the reporting. We should use "negative earnings".  When we use word "loss" instead of negative earnings the mind look for this word in the reporting statement of the company and observers negative earnings but can not cope with the fact of its synonymity. Therefore, there is an opportunity cost and cost of confusion forming strong friction in the process of underestanding the reporting of the company. 

What does it mean to have "negative earnings".

We know for the fact that when income is less than expenses, we have negative earnings. But what does negative earnings mean. Is it an I owe you statement. If it is, the firm ows to whom. It is either debt holders or stock holders. The debt holders receive their money loaned through mortgage in place so, it can not be debt holders. The only possible option is equity holders. Therefore, negative earnings means be aware equity holders this firm ows you this much in earnings. Given the going concern of the firm, thefirm pledges implicitly and sometime explicitely to recover the negative earnings in the comingyears. 

However the important question remains. Why earnings are negative and what does it mean. We do not have negative prices nor do we have negative valuation. The most plusible answer to this question is the signaling induced by negative earnings to the quity holders that this firm ows you this much. But, owing to the equity holders does not mean anything. Equity holders tither have earnings or not. We can not distribute the negative earnings among shareholders since the property of the equity holders stops at the zero price for each share they hold. So it can not be the owing. 

I propose that negative earnings be a promis to equity holders that we compensate you with earnings for the investment we already made and are in place. 

Language equilibrium.

Whenever we talk to someone and our meaning underestood by the counterparty we established a language equilibrium. When we fail to convey the meaning in a way that the counterparty does not underestand the meaning of our language usage, there is no equilibrium as a result. 

The langugae equilibrium can be fast through a word YES or it can extend through time by establishing the argument making ready for the counterpart to underestand the context and the equilibrium establishes through time. 

The joint underestanding of the context of the talk is the remark of the equilibrium. 

Chicanery is always a potent hedge.

Chicanery, doubletalk, sophistical statement, and doublespeak are always potent hedge. Why. Because Chicanery straddle on two position with seemingly an effortless endeavour. The person comes up with a chicanery consept proposes it to the counterparties and two outcome realized. Either counterparts correct the sayer or it remains uncorrected. Very pecular attribute of Chicanery is that it has both langugae equilibrium and language disequilibrium. The counterparties extract the meaning according to their operceived context. There is no shared underestanding of the consept which leads to language disequilibrium I called broken equilibrium continuity. The only effort of the saye of the Chicanery is the time spent on coming up with the double talk. 

Consider the word "War". Both sides of the war use the word war no mather on which side they reside. The outcome of the war is defeat or victory and the word war straddle both legs. This is a potent hedge. No matter if you lose or win the war, if there is such thing, you enjoy the benefit.   

The proposed two optimized word of war to crack Chicanery involved.

Our War = Waran

Their War = Warad

Fathom the contradictions and find yourself a potent hedge. 

Holding two diametrically opposite meaning is a skill. I call it fathoming the contradictions. For example a parachuter may both fear height and enjoy experiencing it. This skill present an opportunity for hedging. Our parachuter go long on the enjoy of parachuting and go short on the fear of height to form a fear hedge decision portfolio. How our parachuter form her hedge position. On long side she spends money to do the parachuter from height of sky. On the short side she sell the fear of height perhaps through internet where she can also borrow the fear of height from others, usually for free, and post videos of this fear online and she is all set for her decision hedge position. In this way the parachuter can maximize her gain from the action by maximizing the adrenaline if that is her target.

For example in fintaran, optimized word for finance force, we look at the value premium. If it is a compensation for a systemic risk why this risk is not captured by market systemic risk. If it is a compensation for idiosyncratic risk then it become known risk factor and thus, an aspect of systemic risk should captured it. If it is source of arbitrage, why its return does not erode through time. All this contradictions is held by all market participant because they face the value premium and yet do not know its source and again yet they use it. Speculations on the source of excess retun of the value premium shifts between the systemic and idiosyncratic or both. Therefore, the value premium remain a contradiction and a potent hedge factor. 

Arbitrage only happens in space.

Time arbitrage is impossible because we do not have access to the future. Therefore, arbitrage remains only in the realm of space. ALthough speed has a close relationship with time but speed itself is arbitrage in the sense of spacial framework. 

Japanese Market and mean addition form of innovation. 

It is long being underestood that Japanese market stagnate meaning that nor grows nor tanks. I pertain this importance to the form of innovation japanese market experience. It is only the form of mean addition and white noise. There is no mean revolution mainly due to the fact that ownership structure of Keiretsu kills the mean revolution innovation. Why. Because the company constructed ownership structure of Keiretsu shut down all potential competetion in the market for ideas and remains with the mean addition form of innovation. Competetion is necessary condition but not sufficient for inducing mean revolution innovation. An employee comes up with the mean revolution innovation immediately met with hard construct of Keiretsu since this construct treat the new mean revolution as potential threat. So, this construct either shut down the idea by firing the mean revolution holder or assimiliate him in the construct by bribing a lucrative increase in the payment. Therefore, as a whole Japanese market stagnate. 

Hedge the Ricardian rent.

From Wikipedia on the Ricardian rent "The law of rent states that the rent of a land site is equal to the economic advantage obtained by using the site in its most productive use, relative to the advantage obtained by using marginal (i.e., the best rent-free) land for the same purpose, given the same inputs of labor and capital."

So, imagine the marginal land produces 1 bushel of wheat and the most productive use of the land produces 5 bushel of wheat, the Ricardian rent of the subject land is equivallent to the price of 4 bushel of wheat. The earnings of the landlord on rent arises from productivity differential between the land he owns and the marginal land. 

A proposed hedge strategy includes going long on the land the landlord owns which is already established and borrwing and selling the marginal land. When selling the land, the outstanding loan balance typically needs to be paid off at closing. This means that the proceeds from the sale will first go toward settling the loan. In this way, the landlord maximizes the earnings arsing from his position. 

Every model other than budget constrants must have residuals.

The only known model without residual is the budget constraints which is the modelling of the accounting identity since by designed it renders no residuals. All models except budget constraints therefore, must bear residuals. This is a direct result of uncertainty. We can not model the world without uncertainty. The reporting of the residual of the model is also of singular importance giving the readers a taste of the making of the residuals which is pertinent. 

Lets have an example in finance. The strong form of efficiency claim that all public and private information including white noise is captured in the price of securities. This can not be the case since all models except the budget constraints must have residuals. So the correct formating of efficient market hypothesis, the strong form, is that prices relatively reflect almost all public and private and white noise. 

There is no invisible hand of the market. If you see it name it. 

The concept of the invisible hand of the market is pure chicanery. The invisible hand of the market claims something that can not be disproven or proven for that matter since there has been no model proposed to represent the invisible hand of the market nor there is no experimental design to gauge the effect since it is by definition invisible. Does invisible hand of the market like many other doubletalks provide a hedging opportunities. YES.

The winner strategy can claim that it was due to invisible hand of the market belief. The loser of the strategy also can claim that it was due to the invisible hand of the market. Retracting their own makings of the strategies. So, quite obviously the invisible hand of the market straddle both sides of the argument while in essence not being there in the first place. Very complicated situation arises. Who is to blame for the loss and who bears the fruits of winning. I lost to the invisible hand of the market and I won thanks to the invisible hand of the market. Both argument futile yet recurrent in the current setting of the market. 

Money can not be smart but individuals can.

Another chicanery in frequent usage in the current settings of the market is the term "smart money". Money can not be smart but individuals can take smart decisions. By reverting to ths chicanery, actor abstain from smart decisions and revert it to the smart money that is not exist. Detecting the smart money is impossible due to the fact that money is homogenious in essense.  Like many other chicanery this concept also present a hedging strategy. One can go long in this strategy by using this term and go short on the smart money by distancing himself of this concept. He can also borrow from other users in the market and sell it quite easily. Given the frequency of the usage and favourability that it presents the strategy can bear handsome earnings. 

Omnipresent are not the markets.

The markets are not omnipresent so the arbitrage opportunities always exist.  All markets have closing and begining time so are limited in time and in space. We know that arbitrage opportunities are not realized in time owing to the fact that we are encircled by time. However, the space always is breeding foundations for arbitrage opportunities.  

Bubbles no more.

What is a bubble. Proponents of the bubble do not provide a clear cut definition of this term which makes it a vivid chicanery. However this chicanery, unlike many other chicaneries does not provide a hedging opportunity. There is no hedging strategy to treat the so called bubbles in the market since it works through time. There is always short legs available for market force but the long leg is always absent. This makes the shorting action quite risky. 

More importantly, the advocates for bubble in the markets should respond to this question as why there is no push for detecting and nullifying the reverse bubbles namely, the dips in the markets. The simple fact that the shape of the bubble is not known untill the market reveals it shows that no one can call the so called bubbles beforehand. We can not call the result of uphills and then downhills of the realized market prices as price correction since prices can not go wrong on the market wide average and it is embded in the infstracutres of the markets. 

On the finite sets of infinity.

Brain is a finite set yet it contains many infinite sets as attested by all theories of infinity in science.  No matter how much we try, we are confined by the finite set of infinity meaning that we only underestand infinity in the finitely defined sets. Therefore, it can be said that all infinite sets are finitely defined. In definite infinite sets does not exists since it lies beyond the comprehension of our mind. 

Proof Reading "Missing Financial Data" published in RFS.

Svetlana Bryzgalova,  Sven Lerner,  Martin Lettau,  Markus Pelger

In the electronic format of this article, I spot an error. The word "indicate" is mentioned twice. 

The Abrevaya and Donald (2017)’s data from top empirics economic journals indicate indicate that close to 40% of all the papers published in those journals had to deal with missing data, and about 70% of those simply drop missing observations.  

Cash is not a standalone variable.

The practice of isolating cash and investigating it as a standalone variable is faulty in nature. Cash is an investment inseparable from investments on the grounds. Wages, working capital, cash reserves in bank account all are investments therefore, isolating cash as an standalone variable causes misunderstanding of its nature. If we isolate cash and treat it as an independent or dependent variable for that matter, we introduce an erronious misconception that cash can exist without investment which is obviously wrong. A firm that only holds cash does not exists. Think about formation of a firm. The firm has an idea, raises fund in the form of cash or noncash and invest on that idea. In a sense commercializing the idea. Therefore, since inception of the firm cash is not a standalone variable. 

Cash should be investigated in the form of investment to avoid confusions and misconception of the research topics. 

The mystery of investment changes.

The changes in investments comes in two parts, mean addition and mean revolution. The mean addition part is a result of changes in dividends, changes in net debt issuance called debt mutation, changes in net equity issuance called equity mutation, and changes in internal cash flows. 

If the chnages in investment is not the result of mean addition it is financed through mean revolution. Changes in investment synergy, changes in the relative pricing of investment vis-à-vis the competitors are the suspect. The other source of mean revolution for investment is subject of further research. 

This concept applies to other sources and uses of funds namely dividend, net debt issuance, net equity issuance, and internal cash flows. 

On Nonstandard Errors paper in the Journal of Finance 

CoAuthors

In science, evidence is generated to test hypotheses in an evidence-generating process (EGP). We claim that EGP variation across researchers adds uncertainty—nonstandard errors (NSEs). 

I argue that this paper is faulty in their experiment design. The authors report the statistics on the result driven evidence-generating process (EGP) yet they fail to report the nonresult evidence-generating process (EGP). The evidence-generating process (EGP) and the resulting nonstandard errors should compile all result driven and nonresult driven procedures. The worst part is that the paper reports on the result driven procedure and labels it as evidence-generating process (EGP). This is faulty. It means that they gathered all the statistics pertaining to the result while leaving out all other procedures that conducted yet were not reported mainly due to lack of significance or any other reasons. If they include the nonresult driven results the nonstandard errors would go down, how much is unclear to me. 

The unanswered question in the number one most cited paper in the Journal of Finance "On Persistence in Mutual Fund Performance" by ark M. Carhart

The only significant persistence not explained is concentrated in strong underperformance by the worst-return mutual funds. 

Persistence in mutual fund performance does not reflect superior stock-picking skill. Rather, common factors in stock returns and persistent differences in mutual fund expenses and transaction costs explain almost all of the predictability in mutual fund returns. Only the strong, persistent underperformance by the worst-return mutual funds remains anomalous.

However, the severe underperformance by the bottom-decile mutual funds may not have practical significance, since they are always the smallest of the funds, averaging only $50 to $80 million in assets, and because the availability of these funds for short positions is doubtful.

I propose that the anamalous existence of these strong underperformer funds is due to Money Laundering in the market. 

Why we never comprehend the origin of the existence. 

We are confined by time. To understand the origin of the existence, we need to be expunge from the time line and observe its originality. A taks that is impossible to even fathom unless there is an orthogonal force right angeled with respect to time, space and being ease up this process. 

Why Markowitz portfolio selection theory is wrong. 

On the impossibility of the exclusion theory of set theoretic. 

We can not form a set by exclusion meaning by listing all the attributes that is not applied to our target set since we can not list all the attributes that does not apply to our target set. This is due to our lack of underestanding about all the attributes of the larger sets. 

Suppose we know all the attributes there exists. This form a closed set contained in another set that we do not know its attributes. So by definition we can not form a set by excluding all the attributes there is. 

So therefore, one must define a set on what it is not by what it is not. 

A theory of confusion. 

We start by mapping the space/time/beings of what we know and what we do not know. 

We know We do not know

We know We know

We do not know We do not know

We do not know We know

Confusion arises when there is overlaps between any of these possibilities. How to avoid confusion is to define what we know and what we do not know in a careful obsessive way. 

Why the position of a judge always must be orthogonal to the invested parties. 

For a fair trial, the position of the judge must always be orthogonal to the invested parties. Any tilts towards any invested parties results in favouring one party over another party. This is not a desired outcome from judiciary standpoint. 

How to position oneself as orthogonal to the invested parties. The established orthogonality must be on appearence and essence. Independency in judging fulfiled by devoting attention and earnest efforts to both appearence and essence of judging. The judge must have optimized although never complete set of actions to promote the appearence of orthogonality. The essence of the judging fulfiled by adherence to the code of law to its fullest possible way. 

It must be noted that complete orthoganility is never attained since adherence to independent appearence and essence of the law in absolute term due to friction arising from our actions is next to impossible. So, how to avoiding the tilting. I promote an oscillation type of orthogonality that oscillate between two parties at random. This can be taught and I devised a near to complete set of action to deliver. 

Why drawing a perfect circle, square, and triangle is always impossible. 

Since the percision is a subset of an open set of uncertainity. In simple words uncertainity always present when we draw a circle, square, or triangle. We never attain complete percision. 

Therefore, the combo words of perfect circle, perfect quare, or perfect triangle must be avoided at all time and space and beings. 

Double differencing represents mutation. 

Let's start by a simple math. We assume three period settings stamps by t2 t1 and t0. This is necessary since this minimum time stamps are necessary to develop our model of double differencing.

d0 d1 d2

DeltaD1 = d1- d0

DeltaD2 = d2- d1 

DeltaD2 - DeltaD1 = d2- d1 - (d1-d0) = d2 - d1 - d1 + d0 =  d2 - d1 + do -d1

The reference point therefore becomes d1 which represents the overlapping time stamps. Any difference of d2 with respect to d1 is added to any differences of d0 with respect to d1 and added up to form the mutation. It represents a mutation since it is differentiated over the overlapping time stamps namely d1. 

On erroneous representation of stock market indexes. 

Does stock market indexes represent time continous prices. No, it does not. Markets have opening and closing. So, the correct representation of stock market indexes is the one that discontinued at closing of the market and reapeares as the markets open. 

In the emperical studies this poses a great threat to the results of the investigation. If the closing and opening of the market is not corrected, the researcher relate time continous arrival of the information to the nonexistent market which may be resulted to inefficiency of the market, efficiency of the market or indifference of the market depending on the type of information observed. 

For the investor, this erroneous representation propagates the idea of time continuity in indexes which is fully wrong. 

The Dividend Disconnect

SAMUEL M. HARTZMARK, DAVID H. SOLOMON

The paper claims that many individual investors, mutual funds, and institutions trade as if dividends and capital gains are disconnected attributes, not fully appreciating that dividends result in price decreases.

It is not the Dividend Disconnect but it is the price of dividends that fluctuates and renderes stock price dividend disparity. The deman for dividend goes high and the price of $1 for dividends diverges to say $1.2 for each dollar of dividend paid. This $0.2 causes price disparity and reconciles with stock prices in illusionary anomalous way. 

The price of dividend model also explains the Marketwide Predictable Price Pressure by SAMUEL M. HARTZMARK, DAVID H. SOLOMON. 

How to treat outliers in the data.

You must run two sets of result driven process. One set of results with outliers included in the data. And the other excluding the outliers by setting them to missing. 

You must report two sets of results in parallel. The publishers may decide to place the set of results with outliers in the appendix or not, it is up to them. 

HCAPM stands for Hedged Capital Asset Pricing Model.

We run a Capital Asset Pricing Model (CAPM) on a sleected portfolio return and collect the residuals. The residuals have panel data attributes meaning they have firm and time dimensions. From multitudes of the researches, we know that this residuals contain some structural information namely, HML (High Minus Low), SMB  (Small Minus Big) , RMW (Robust Minus Weak) , and CMA (Conservative Minus Aggressive). Let's add WML (Winners Minus Losers) for the sake of completion if there is such a thing. 

If we treat residuals as dependent variables and charge the regression with all other than CAPM factors, we must find significance on the dependent variables and washed residuals resulting in no additional structured information in them. 

The first and foremost question is that why the other factors do not appear in CAPM model. Maybe CAPM is a model that dictates what it should be rather than what it is. Then, why there is discrepancy between the what it should be and what it is. It is possible that other factors than CAPM represent different dimensions of risk and return. But, what are those dimensions of risk and return. 

A very interesting idea comes to my mind. The CAPM model and other hedging portfolio are not homogenous. CAPM is not a hedged portfolio. How to level the analysis by homogenizing the other factor than CAPM and CAPM itself. This is easy. An investor can go long on the market index and short the index by borrowing and selling it at the same time. I call it HCAPM stands for Hedged CAPM model. 

I do not have access to the data and am open for coauthorship on this idea like my many other ideas if you find them holding water. 

When prices go stationary.

There is definitely some periods that market wide news does not have impact on a given firm. There is no trading on the market and thus the price of such firm goes stationary. A period of silent news experienced by this firm. Firm goes under the radar. It does not appear in the market portfolio since there is no trading on its share. Reapearence of this firm is either as a result of market wide news or shareholder news. It requires a bit of emperical work to disect the two. When there is no market wide news pertaining to the firm it has to be due to shareholder news that stock price of this firm traded and thus changed. 

This emperical setting has wide range of benefit for research. The most important part is disection of the market wide news and shareholder news. Apparantly, both of these sources of news differ by much. 

It also provide a very fruitful foundation for testing efficient market hypotheses. 

I am happyto coauthor in this topic. 

How to write nonsense.

To write a nonsense, you should be the first one to note that your words mean nothing. When you satisfy yourself then it comes the turn of other parties to submit to the notion of nonsense in your writing.  Wrtiting nonsense is an arduous task since you should form your argument in such a way that it relays no information at all. If there is a glimpse of information in your writing you literally have failed to produce a nonsense. This is a skill and a useful one I might add. Why. because the nonsense convey information of no information. This is a skill which could potentially optimised through exercise. The one who is most potent in producing nonsense could potentially be the target guy to say what arguments are nonsense. 

The real genius is in the way you produce nonsense and sell it as informationallypotent read. This is an art. How to produce nonsense and sell it as nonsense. Think. 

Example sentence os nonsense. 

The rain is rainy.

The sun is sunny. 

The way is the road. 

This way is the way. 

Your way is your way. 

On the price of dividends.

Dividends have price. The golden rule is one dollar for one dollar of dividends. However, price of dividends diverges from this golden rule when dividends are in high demand. Almost always dividends are in high demand therefore, one dollar of dividends sold for more than one dollar in the market. This create an illusion of behavorial bias while it is mere mechanic of the market. Retail investors, mutual funds and other institutional investors are in search of dividends. A wise investor buys dividend paying stock before Ex-dividend date and sell it at payment date. This is a lucrative strategy because of divergence between price of dividends and nominal dividends. 

Survival rate or default probability.

Natural state of a firm is the going concern. A firm is expected to live not to default. So, what is proper to estimate the survival rate or default risk. 

On momentum my nightmare solved. 

I simply decomposed the net return of winner and loser portfolios into initial investment and gross return.

As evident, the ratio of initial investment of loser over winner is always larger than the ratio of the gross return of loser over winner.

It means always the initial investment of the momentum strategy bigger that prospectus gross return of the strategy and therefore, it is always rational not to take part in this strategy.

Future Fear.

Future is full of fear. We do not know all the variables' destiny in the future. We do not know if the players present in the future. We do not know if the variable remain the same in the future and we can not predict their behaviour in presence of future uncertainity. Plus, we do not know what we do not know. It is scary, isn't it. Given these circumstance is it wise to try to forecast the future. 

Rational exuberance.

When you are filled with energy, excitement, and cheerfulness and you know why you feel that way.

So maybe the Irrational exuberance is

When you are filled with energy, excitement, and cheerfulness and you do not know why you feel that way.

But, Robert J. Shiller define irrational exuberance as

Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases, and bringing in a larger and larger class of investors who, despite doubts about the real value of an investment, are drawn to it partly by envy of others' successes and partly through a gamblers' excitement.

So, irrational exuberancer knows why he feels that way.

We have a problem.

P/E confession.

Price to earnings ration (P/E) tells me with how many earnings I can buy the firm. If price is stock price and earnings is earnings per share, then the P/E ratio tells me with how amny of EPS recieved I can buy a share of the firm. There is a discrepency in the ratio however, see below

Price/ Earnings per share = Price/ (Earnings/Number of share outstanding) = (Price x Number of share outstanding)/ Earnings = Equity market value / Earnings

This is the correct way of forming P/E not any other way. 

Now, the ratio tells me with how many of earnings recieved I can buy the firm. For example, if P/E is 30 then I can buy the firm when I received the exact earnings I apply to form the ratio 30 times.  

Now, let's compare P/E 30 for firm A with P/E 10 for firm B. The P/E 30 for firm A tells me with 30 of the exact earnings recieved I can buy the firm while P/E 10 for firm B tells me with exact 10 earnings I can buy the firm. All else being equal, the P/E 10 is preffered always. But, we know that very rarely all else remain equal. P/E 10 could be indicative of the fact that B is smaller than B. All else except the size, price, and earnings being equal the ratio tells me the size of the tow firms in comparison namely, we divide P/E of firm A to P/E firm B and arrive at the coefficient 3 thus, firm A is 3 times larger than firm B.

The comparison of P/E between two firms could be indicative of growth options. All else except growth options, price, and earnings being equal we can say firm A has fulfilled its growth potential 3 times more than firm B which has lower growth potential fulfilled. 

Therefore, leasons learnt

1- P/E is the ratio of equity market value over earnings only and not price over EPS.

2- It is important to isolate all else to investigate the desired dimention of the analysis. 

3- You can divide the P/E to compare firms relative pricing and earnings. 

(Pa/Ea) / (Pb/Eb) = Pa/Pb x Eb/Ea

On Value Premium.

First let's define our inequality which holds by design. L stands for Low and H stands for H. P stands for market value of the equity and E stands for earnings.

PL/EL < PH/EH

Then we have

PL/PH < EL/EH

It means the ratio of the price which is initial investment is always less than the ratio of earnings. This means with initial investment of PL/PH it is always guaranteed higher ratio of earnings of EL/EH. 

The important question remains. Why CAPM does not capture risk-return of the value premium.

Job diversification and idiosyncratic risk. 

We can not diversify our job. Usually, peaople stick to one job and live their life. This means all workers are prone to idiosyncratic risk. But, what are the implication of such open position to idiosyncratic risk. It for sure increase our risk exposure and risk per se. Could it be mitigated. Virtually, it is impossible to diversify the idiosyncratic risk sine by definition of the job memorandum we are mandated to take one job at a time most usually. Is it the job of the employer to cater for this additional idiosyncratic risk. Some employer cater for this risk others don't. The employer can provide additional return for taking up this additional risk. 

There could be an insurance company that diversify on idiosyncratic risk of individual worker and the fee could be paid by the employers. 

Reverse strategies and the CAPM.

We have four known anomalies HML, SMB, RMW, CMA.

I propose that in the market there are investors who take the opposite side of these strategies namely, LMH, BMS, WMR, and AMC. Therefore, in the market we have

HML + LMW = 0

SMB + BMS = 0

RMW + WMR = 0

CMA+ AMC = 0

Thus, CAPM remains agnostic with regards to these anomalies and the long sides of the equation remain significant in the factor model.

Testing this hypothesis is easy but I do not have access to data. Are you interested?

CEOs’ narcissism and opportunistic insider trading.

Cheng Jiang, Kose John, J.H. John Kim, Jingyu Zhang

Great paper published in Journal of Corporate Finance (2025) with a nice and neat empirical design. The paper relate CEOs’ narcissism to opportunistic insider trading and find that narcissistic CEOs engage more in opportunistic insider trading.

The paper utilises an IV which is if CEO have sibling or not. In my opinion this IV does the job well.

Beta estimation precision and corporate investment efficiency.

Lee Biggerstaff, Brad Goldie , Haimanot Kassa

A great paper with a clever idea published in Journal of Corporate finance (2025).

The paper study the impact of the precision of beta estimates on firm investment decisions, and find that firms with precise beta estimates invest closer to their expected levels.

My only problem with the aper is their estimation of beta excision. They use CAPM model and estimate beta in a rolling fashion and collect the standard errors of the estimates and multiply that by minus one to come up with an estimation of beta precision.

The problem is that standard errors are highly sensitive to the number of observation. Although, the authors mentioned that they confined the sample to at least 12 observation per estimate, they did not provide a robust treatment of the beta precision estimate to the number of observation.

Valuing Financial Data

Maryam Farboodi,  Dhruv Singal,  Laura Veldkamp,  Venky Venkateswaran

Very ambitious paper with a clever model.

However, according to the paper the investor who participate in generated equilibrium "... use data to seek alpha. ". How about other investors that are seeking to simply diversify. Index investors and other types investors. They have need for data and are excluded in the model. I found no treatment of such investors in the paper.

Fractional Trading.

Zhi Da,  Vivian W Fang,  Wenwei Lin

Wonderful paper. A great read and neat empirics.

My issue is with the term "bubble" used in the paper. The paper suggest a mechanism of the so-called bubble. "When speculators like FT traders pour into a meme stock like GameStop, its price increases. Capital providers may interpret the price increase as a positive signal of firm fundamentals and become more willing to offer capital. The enhanced access to financing improves firm valuation, prompting more speculation."

I have issue with the term usage "may" in "Capital providers may". This is not a definite identification. In no other places, the authors provide explanations.

Fro example, about GameStop saga it could be retail investors rebel against established institution called short sellers. A type of crowd funded hostile take over.

The fact that authors find "we find that a FT-facilitated bubble is more likely to occur in a high-priced stock if a firm faces more binding financial constraints (proxied using a lower credit rating), " corroborates with the rebel against institution hypothesis I proposed.

House Prices and Rents

Eugene F Fama,  Kenneth R French

A novel idea. A nice and clean empirics. 

The problem is the Shiller (1981) problem—strong variation in asset prices unrelated to expected cash flows. The setting is the housing market so the problem is the evidence that house prices contain rational assessments of expected rents (and in this sense forecast rents) is weak. The treatment is monthly CS demeaning of regression variables. The paper offers a simple remedy for the problem. "If the variation in house prices unrelated to expected rents is correlated across areas (e.g., price variation due to shared variation in discount rates), it can be removed in whole or in part via period-by-period cross-section (across-area) demeaning of regression variables. "

My issue is that the variation in rents is also correlated across areas. When we demean the regression we reduce the variation in the rent and house prices alike. It has to be that the variation in house prices correlated accross areas are much more responsive than the rents. Basically, my argument is that demeanind the regression reduces the variations in house prices and rents. What ever the reason that obfuscate the results the house prices unrelated to rent affects both rents and house prices. The monthly cross-section (CS) demeaning of regression variables provide yet another layer of uncertainty. The big problem is that the paper does not offer why the demeaning results in better relationship between house prices and rents. The usual suspect proposed in the paper are time variation in discount rates for expected rents or irrational market forecasts of rents. And in a paragraph authors account for "price variation due to shared variation in discount rates".

The authors reinforce their claim that "The higher volatility of house prices leads us to infer that lots of price variation is due to some combination of market biases in forecasts of rents and variation in the discount rates that relate house prices to expected rents.".

For behavioural story to hold water it has to be correlated across areas. Many stories can be told about this. But, why the market does not correct this massive failure of the price signal.

Innovation Under Ambiguity and Risk

Gabriela Coiculescu, Yehuda Izhakian and S. Abraham Ravid

Very alluring topic. An earnest effort has been made to explore the topic and that desrve an acknowledgement. 

The paper claim "Risk (the uncertainty of outcomes) assumes a unique known distribution of future outcomes." . Risk is not uncertainity. Under risk scheme we know the outcomes so it is not uncertain. 

The paper also claim that "Therefore, ambiguity (the uncertainty of probabilities) seems a natural determinant of future prospects.". The ambiguity is the result of uncertanity. We do not know that we know or we do not know. This is ambiguity which is the resuls (articulation) of uncertanity.   Any model of uncertainty should involve a residula of a known model. I did not find this in the paper. 

Noone can model Knightian uncertainty. If you model it instantly becomes known. 

Knightian uncertainty

We know that Knightian uncertainty i.e unknown unknown exits. Does it make unknown unknown, known. Things are complicated, aren't they.

Do you want more of complexity.

We know that Knightian uncertainty i.e unknown unknown >>>

Known, Unknown Unknown

We should have Unknown, Unknown Unknown.

And the loop continous until head spins.

The Gordon Growth Model Formula and organic ESG, DEI.

P = D1/(r-g)

here:

P=Current stock price

g=Constant growth rate expected for dividends, in perpetuity

r=Constant cost of equity capital for the company (or rate of return)

D1=Value of next year’s dividends per share

The key point is g=Constant growth rate expected for dividends, in perpetuity.

The constant growth date expected for dividends which is value maximising aspect of the model and "in perpetuity" refers to maximising longevity of the business.

Therefore, any rational organic DEI, ESG should focus on these two aspects.

Value PhD students versus Growth PhD students.

Value PhD students are those students that have not so many ideas and already may published some of their ideas and Growth PhD students are those students that have number of not yet fulfilled ideas. Which students you invest on more?