Circadian, you really think the quants will succeed? I have my doubts from the standpoint that in order to do that you will need to get a decent quant model for the individual agents- people. We are talking about a quantitative predictive model for the actions of people, not in my lifetime I think. Macroaveraging smooths things out, however the fact still remains that people cannot be described by an equation.
The thing that people don't get is that active trading is necessary for maintaining some level of market efficiency. If the market was perfectly efficient there would be no reward for active trading - everyone would be a passive indexer - for example in the equities space. However, by doing that, market inefficiencies wide enough to drive a truck through would arise. And you know what that would lead to? You guessed correctly - active trading. BTW, some things are predictable (and I am not necessarily talking about prices here) until everyone else discovers the game and jumps in. One of the early DE Shaw strategies which was (emphasis on the was) quite profitable relied on predicting some of the eigenvectors of a security basket's correlation matrix (but not the dominant eigenvector).
well, the pure academic doesn't really care... it's more or less just a very nice playground for mathematics... (that is with the assumption of an efficient market) Academics have cared about the viability of trading, that's one of the reasons they study these things. Many of the Wall Street quants care about exactly these things and come from academia. The main conclusion seems to be trading is doable but hard- lol, tell me something I don't know. I personally like to know all I can, articles like this will not make you a trader by themselves, however I do like to have a broader understanding of things when developing ideas. There is also one important issue here that people should understand: the autocorrelations used are simple pairwise correlations. My conclusion is that more complex correlations are not captured by such functions. In other words if you start looking at complex price patterns and bring in other variables other than price, that simply has not been studied.
In a decade or so, we will look back at 2008 as the period that marked the major transition from EMH to behavioral finance.
The thing that people don't get is that active trading is necessary for maintaining some level of market efficiency. If the market was perfectly efficient there would be no reward for active trading - everyone would be a passive indexer - for example in the equities space. However, by doing that, market inefficiencies wide enough to drive a truck through would arise. And you know what that would lead to? You guessed correctly - active trading. Good point equalizer, I agree when you really dig at EMT, all sorts of paradoxes arise. Also consider the fact that rational behavior is not definable! buying may be rational for some and selling for others, all dependent on individual taste and circumstance. Waiting may actually be the rational course of action when acting on information, or maybe it takes a long time to come to rational conclusions... anyway assuming that you can calculate 'rational' is very Marxian/communist at its core.
Another one of those post..sigh.. no offense but who the hell cares. People are able to make loads of money without caring about this academic non sense..and making money is key point. Academics are just for the ego of proving right or wrong..and having an ego will not help when you are in the market.
well I care about this topic, if you don't then why did you read 3 pages and post? wanting to understand the right/wrong about the nature of markets is about ego? ok, got it, thanks
I respectfully disagree. The topic is relevant because if this is indeed a major turning point in favor of behavioral finance then there are major implications regarding investing/mechanical strategies going forward. Take your pick from the myriad of topics listed here: http://www.behaviouralfinance.net/ For those in need of ideas for mechanical systems or investing strategies...the link above is a major source of inspiration.