Efficient market hypothesis and fraud on the market theory a new perspective for class actions

Following recent judgement of the Supreme Court of US (June 2014), several commentators had declared that “Securities class actions are here to stay” (insidecounsel.com – September 2014, 11). This paper provides a critical perspective on this judgement, which “implicates substantive issues at the intersection of economic theory, financial markets, and securities regulation” (128 Harv. L. Rev. 291 2014-2015, 291), and shows that we must be much more careful. This recent judgement is based on the Fraud on the Market Doctrine, which was introduced in 1973 in order to preserve the class action procedure in securities fraud litigation. The characteristic of the Fraud on the Market Doctrine is to have been structured from one of the most popular financial theory: Efficient Market Hypothesis. In this paper, by analysing the implementation of the Efficient Market Hypothesis in Fraud on the Market Theory, we argue that if the Supreme Court had to take position for a second time about the Fraud on the Market Doctrine it is due to the practical difficulties inherited from Efficient Market Hypothesis and that have raised several problems to the US courts, including the Supreme Court. This issue is illustrated by the definition of Efficient Market Hypothesis lawyers used (“most” vs “all”/”fully”). As this paper shows, if “Securities class actions are here to stay”, the opportunity to open such a class action is strongly reduced in the facts

Dialectic tensions in the financial markets: a longitudinal study of pre- and post-crisis regulatory technology

This article presents the findings from a longitudinal research study on regulatory technology in the UK financial services industry. The financial crisis with serious corporate and mutual fund scandals raised the profile of compliance as governmental bodies, institutional and private investors introduced a ‘tsunami’ of financial regulations. Adopting a multi-level analysis, this study examines how regulatory technology was used by financial firms to meet their compliance obligations, pre- and post-crisis. Empirical data collected over 12 years examine the deployment of an investment management system in eight financial firms. Interviews with public regulatory bodies, financial institutions and technology providers reveal a culture of compliance with increased transparency, surveillance and accountability. Findings show that dialectic tensions arise as the pursuit of transparency, surveillance and accountability in compliance mandates is simultaneously rationalized, facilitated and obscured by regulatory technology. Responding to these challenges, regulatory bodies continue to impose revised compliance mandates on financial firms to force them to adapt their financial technologies in an ever-changing multi-jurisdictional regulatory landscape

The business school in the Anthropocene: parasite logic and pataphysical reasoning for a working earth

We have entered the Anthropocene: a new geological epoch in which human activities, led by business interests, have inexorably compromised the Earth System. The current failure to provide a comprehensive and systematic response to this transition does not result from a lack of reason but is instead the manifestation of a generalized crisis in communication. Drawing from the work of Serres, we analyze how the roots of this crisis lie with the 'parasite logic', which has prevented reasoned responses to the Anthropocene. To work through this crisis, it is necessary to adopt different forms of reasoning and imagination to reshape the rational basis of management education. We propose to do it through pataphysics, a science subjecting dominant modes of rationality to a divergent thinking of the absurd and proposing playful forms of reasoning. Pataphysics provides a mechanism for developing 'imaginary solutions' to the current situation, that can disrupt anthropocentric forms of reason and reasoning, and further serve to slow down the endless cycles of inclusion and exclusion that arise from parasite logic. Finally, we propose slow design as an example of an 'imaginary solution' that comes from this process of conceptual and practical deacceleration

Between complexity of modelling and modelling of complexity: An essay on econophysics

Econophysics is an emerging field dealing with complex systems and emergent properties. A deeper analysis of themes studied by econophysicists shows that research conducted in this field can be decomposed into two different computational approaches: "statistical econophysics" and "agent-based econophysics". This methodological scission complicates the definition of the complexity used in econophysics. Therefore, this article aims to clarify what kind of emergences and complexities we can find in econophysics in order to better understand, on one hand, the current scientific modes of reasoning this new field provides; and on the other hand, the future methodological evolution of the field

Hayek and the use of physics in economics: towards a progressive synthesis?

F. Hayek is known as an economist and a political philosopher who provided a specific social theory based on the idea of spontaneous order. This order state comes from a process that Hayek called 'catallaxy' and that results from a particular phenomenon of emergence. In this context, social systems such as money, market or language are presented as spontaneous orders, resulting from a particular evolutionary process of society. Although Hayek is well known to be an opponent of importation of physical concepts into economics, this article proposes a parallel between the Hayekian theory and a new field called 'econophysics'. More precisely, I will show how the way of characterizing the phenomenon of emergence by econophysicists might, to some extent, be an analytical characterization of the Hayekian emergence. This claim will be explained and illustrated with the presentation of econophysical works describing money and language as a spontaneous order taking the form of a power law. The last section will discuss the debates about the methodological relevance to associate Hayek's theory with an area of knowledge coming from physics and the potential\economic implications of such a rapprochement

Financial economics and non-representative art

In this article, I consider financial economics as an artistic science in which interpretation plays a key role. After having reminded the importance of the Efficient Market Hypothesis [EMH] in the development of institutional frameworks, we present EMH as a work of art-we illustrate this point by considering EMH as an ironic and a non-representative art in which the theoretical picture tends to replace the reality (thanks to technology). This process leads to the creation of a 'hyper-reality' that is paradoxically unable to predict or to explain the financial reality. In line with a postmodernist perspective of science, I claim here that financial economics and technology are used not to describe or to better understand the financial reality but rather to invent it

Pataphysics of finance: An essay of visual epistemology

Since the economic crisis of 2008, numerous observers have called into question the way that financial knowledge deals with economic reality. In this challenging context, the time has come to embark on a reflection about the role of finance (and financial knowledge) in our contemporary society. This article contributes to this reflection by expanding the process of research through a pataphysical parody illustrating the imaginary dimension of financial knowledge and its implications for accounting practices. Although this imaginary aspect of financial knowledge is often forgotten in finance, it is nevertheless very important since, as I will explain, it directly shapes the computerization of financial markets and can eliminate the economic referent of accounting signs. These claims will be discussed through the lens of a visual epistemology based on the science of imaginary solutions (pataphysics) to illustrate this imaginary nature of financial models. Discussion of the paradoxical consequences implied by increasing computerized implementation of an imaginary solution will ensue. More generally, this paper proposes, on one hand, an original (and critical) perspective on financial knowledge, and on the other hand, an invitation to discuss and escape (from) the mainstream paradigm for the purpose of promoting pluralism in finance

1996–2016: Two decades of econophysics: Between methodological diversification and conceptual coherence

This article aimed at presenting the scattered econophysics literature as a unified and coherent field through a specific lens imported from philosophy science. More precisely, I used the methodology developed by Imre Lakatos to cover the methodological evolution of econophysics over these last two decades. In this perspective, three co-existing approaches have been identified: statistical econophysics, bottom-up agent based econophysics and top-down agent based econophysics. Although the last is presented here as the last step of the methodological evolution of econophysics, it is worth mentioning that this tradition is still very new. A quick look on the econophysics literature shows that the vast majority of works in this field deal with a strictly statistical approach or a classical bottom-up agent-based modelling. In this context of diversification, the objective (and contribution) of this article is to emphasize the conceptual coherence of econophysics as a unique field of research. With this purpose, I used a theoretical framework coming from philosophy of science to characterize how econophysics evolved by combining a methodological enrichment with the preservation of its core conceptual statements

The valuation of social impact bonds: An introductory perspective with the Peterborough SIB

Social impact bonds (SIBs) are financial assets whose objective is to attract investors to fund social programs by providing them an incentive if the project meets its predefined targets. This article aimed at proposing a reflection about the development of a pricing method for this kind of financial assets in an uncertain environment. After having defined SIBs and presenting their intrinsic uncertainty in the first section, I will present, in the second one, an existing SIB (called Peterborough SIB) in financial terms. Afterwards, the last section offered an introductory perspective on the potential development of a Wang transformation based pricing method applied to this Peterborough SIB. By using this statistical operator as a statistical technique for converting objective probabilities (past observations) into subjective estimates of these probabilities, this paper investigates a specific way of integrating the uncertainty in related the valuation of SIBs