An interesting hypotheses

[asap]

Quote from nitro:

[Some] Hedge Funds have been having a harder time, since about 2008 until today, with the last year being particularly difficult. I have been studying traditional highly cointetrated pairs (just the simplest case of two series), and watching their cointegration disintegrate in the past few years. So pairs like WMT TGT are no longer cointegrated at any lag, nor are pairs like KO and PEP. So my hypotheses is, I contend that the game has gotten much harder, and this is one of the reasons some traditional hedge funds are disappearing.

One thing that begs the question then is, did the dog wag the tail, or the other way around? In other words, did stocks trade in sync more often in the past because their value was similar and their earnings generation was pretty similar, or did they just trade that way because the players themselves caused this illusion by keeping the stocks trading in a range in relation to each other? If it is the former, what economic random variable accounts for the break from cotrending? Can the current economic recession have that much effect on businesses that are in an almost identical in the way they generate revenue?

i second that, i will post what a i heard from a deutsche bank fund manager that overlooked one of their long/short equity strategies that had an impressive track record during 10 years (in which i had money), while all the sudden began run south by the time LEH event took place and never recouped the losses ever since.

according to him, those models were created in a macroeconomic context that no longer prevail. the imbalances in world's economy altered the dynamics governing price valuation and thus the edge in those strategies disappeared. he hinted it has to do a eventual shift to a deflationary world in which the wealth destruction is far greater than the amount of fresh money printed by the central banks to keep the economy afloat.

this is just PR BS from a DB manager but anyway, is what they come up with in 2009. to be honest, i agree with him when it comes to weigh the influence of inflation or other important economic trends in price dynamics.

 

[ElectricSavant]

I heard it on Fox Business and I read it on the Internet...It must be true....no?

I think a gold salesmen will confirm it also...while he is snake-oiling the latest and greatest gold coin find just released..

My research is most complete. And my sources are impeccable..

What?

ES

Quote from tenthousandmen:

I'm a little confused how anyone can know for certain that there is a decrease in retail traders in the volume... also confused how people know that more of the volume now is IRA, etc. and not institutional money (besides talking to friends at different firms during lunch).

 

[Quickless]

Not sure what you are talking about with your paired trading but...

You have lots of people, doing everything that can be thought of to get an edge.

You used to trade the week, then the day, now people are trading the tick.

Things that use to work in the past, don't because market participants are responding to a different information set.

 

[cyoungmark]

Quote from nitro:

I am beginning to suspect that the reason is a shift from local economies to international economies. Does this mean that we have to take currency exchange rates into consideration, and therefore how good the company is at hedging [its] currency risk? This is wild, but probably close to the truth. Note that it all boils down to higher dimensional correlates, and their decay.

One idea is to take a companies whose business is strictly local, and see if there is a longer term cointegration in these companies into the present time.

I have a lot of respect for you Nitro, you get me thinking. I have found it interesting, especially more recently, the correlation of the market and currencies. I do believe also that we are experiencing a shift for more local economies to international economies. It's the only thing that seems to make sense.

 

[nitro]

Thanks for the kind words.