Discussion and Applications

Abstract

James Tobin offered the finance literature a paradigm, a measurement tool, and a solution. He expanded Eugene Fama’s efficient market hypothesis to explore further not only the arbitrage process arising out of information, but also the very definition of fundamentals pricing. He then offered one measure, Tobin’s q, to benchmark a financial market’s capitalization of a corporate security relative to the value of its underlying physical assets that create the means to produce and generate profits. He observed that the volatility of measures of Tobin’s q or of market prices for securities seems to defy the current state of theoretical understanding of securities pricing. From this conclusion, his idea of a Tobin tax to stem excessive market volatility has been discussed extensively.