Asset pricing theory abounds with elegant mathematical models. The logic
is so compelling that the models are widely used in policy, from
banking, investments, and corporate finance to government. To what
extent, however, can these models predict what actually happens in
financial markets? In The Paradox of Asset Pricing, a leading
financial researcher argues forcefully that the empirical record is weak
at best. Peter Bossaerts undertakes the most thorough, technically sound
investigation in many years into the scientific character of the pricing
of financial assets. He probes this conundrum by modeling a decidedly
volatile phenomenon that, he says, the world of finance has forgotten in
its enthusiasm for the efficient markets hypothesis--speculation.
Bossaerts writes that the existing empirical evidence may be tainted by
the assumptions needed to make sense of historical field data or by
reanalysis of the same data. To address the first problem, he
demonstrates that one central assumption--that markets are efficient
processors of information, that risk is a knowable quantity, and so
on--can be relaxed substantially while retaining core elements of the
existing methodology. The new approach brings novel insights to old
data. As for the second problem, he proposes that asset pricing theory
be studied through experiments in which subjects trade purposely
designed assets for real money. This book will be welcomed by finance
scholars and all those math--and statistics-minded readers interested in
knowing whether there is science beyond the mathematics of finance.
This book provided the foundation for subsequent journal articles that
won two prestigious awards: the 2003 Journal of Financial Markets Best
Paper Award and the 2004 Goldman Sachs Asset Management Best Research
Paper for the Review of Finance.
