Do you see patterns in Random Walks?

[Nine_Ender]

Quote from the1:

My entire Master's Degree -- Statistical Finance -- is based on the premise that the markets is one gigantic random number generator and 95% of the tools I use are statistical in nature but at the same time, I've stood toe to toe with traders who have come to the industry with backgrounds from the likes of Computer Science or Sociology and wouldn't recognize an Autocorrelation Process if they tripped over it but managed to trade the markets quite competently, nonetheless. To answer the question....does a true random number generator produce patterns? The answer is most definitely yes. I've designed many of them and they have all produced trends, patterns, and chaos. They even produce levels of support and resistance that you would swear are purely psychological if you didn't know better.

So are the markets random? No one will ever be able to answer the question without doubt but it's really not that important because trading profits are more strongly correlated to the talents of the traders, not the design of the system.

Markets are not random, anyone with any sense in this business knows this. There was a coin flipping thread where a bunch of "academic types" ( some of which ironically lacked any common sense ) posted all sorts of crap for months on end. I produced a stock ( Bioval, now Valient ) that was trending higher on fundamentals. The idiots insisted it could be a random chart, despite massive evidance it was not.

Stock continued trended up for a year, gaining 300% profit for anyone riding it. Coin flippers would still be telling all of us they were flipping mostly heads for a year, and the whole thing was random and not due to increasing earnings.

The whole premise of random markets is stupid. It ignores what equities represent, ownership in companies that have growing or declining value.

 

[Nine_Ender]

Quote from rew:

Consequently there is a good reason to believe the markets are significantly more efficient than they were 40 years ago. Hence, prices should be more purely random than they were 40 years ago.

What utter bs !!! Wow.

Efficient markets actually make prices LESS random then before. If you don't understand this basic fact, its hopeless. If a company makes an additional $1,000,000 over estimate on their quarterly earnings, they are worth $1,000,000 more. An efficient market will add the appropriate amount to the share price to reflect this extra money.

 

[Samsara]

Quote from rew:

The sentence quoted was:

"To the contrary, the random walk theory assumes that market participants act rationally, have good information, and that that information is quickly incorporated into prices."

Now, perhaps I should have been explicit and said "most market participants", but I didn't say "all market participants". The EMH doesn't have to assume any "transcendental all", it just has to assume that the big money is generally invested rationally, based upon all available information. The EMH allows for the existence of irrational market players who get taken to the cleaners by the rational market players.

There is a high degree of efficiency in the markets with the result that market prices do indeed look quite random. Successful trading requires finding deviations from true randomness (and thus inefficiencies in the market). The fact that some successful traders exist shows that there are still some inefficiencies in the market. That fact that most traders fail shows that those inefficiencies are difficult to find and exploit.

Look, you're basically just restating the theory. What you're not following is that it's not the <i>tenets</i> of the theory itself that I take issue with, it's the <i>first principles</i> of inquiry upon which it's based. They require XYZ conditions of all market participants (rational expectations, access to information, speed of execution). Yes, the EMH allows irrational <i>behavior</i> to co-exist with rational participants, but that's not the point. Also, I've never seen any account that assumes big money = rational, small money = irrational -- where did you get that from?

Much like how half of all models of market behavior that economists employ implicitly assume a log-normal distribution and then model like crazy off of that, this theory begins by bracketing out reality for a transcendental hypothesis and then proceeds from a top-down basis.

This is why I used the term reification and interjected "all" into your garden variety restatement of the idea. It's an irresponsible hypothesis that was assumed to be a fundamental truth by those who confuse economics with physics (and the lazy), and then went viral.

 

[wrbtrader]

Quote from rew:

...The fact that some successful traders exist shows that there are still some inefficiencies in the market. That fact that most traders fail shows that those inefficiencies are difficult to find and exploit.

I just return to this thread which is actually a repeat of prior discussions at ET involving similar topics over the past many years and like the other threads it really comes down to the above quote that I strongly agree with.

There are inefficiencies in the market and they can be consistently exploited. Yet, I like to add that traders (not many) do notice the inefficiencies but really don't know how to exploit them, don't have the resources to exploit them or don't have the discipline to exploit them.

Mark

 

[MAESTRO]

It is so refreshing to know that majority of people out there are still clueless! I thought that within past 3 - 4 years some of you here could have learned a bit about the subject since so much of the new research results became readily available. I was even worried about possible competition! But, no, still the same dark, uneducated, low-level crowd! Thank you so much for your ignorance. I can still be comfortable in doing my research knowing that majority of you still thinks that the Earth is flat (well, yeah, otherwise all the rivers would just slip away!) Excellent! Animal-like desire for identifying the patterns (whether they exist or not) is the only straw that you grab on to; it's the only comfort that you can provide to yourself without understanding the real picture. Causality is a drug! Accepting the fact that majority of things happen without any cause would be not suitable for our egocentric minds! That is why you always need to know "what happened?" in order to justify your post factious decision making. And you are instantly satisfied if someone explained to you that "the markets sold off on the European worries!" Planet of the Apes indeed!

Cheers,
MAESTRO

 

[goodgoing]

Quote from MAESTRO:

It is so refreshing to know that majority of people out there are still clueless! I thought that within past 3 - 4 years some of you here could have learned a bit about the subject since so much of the new research results became readily available. I was even worried about possible competition! But, no, still the same dark, uneducated, low-level crowd! Thank you so much for your ignorance. I can still be comfortable in doing my research knowing that majority of you still thinks that the Earth is flat (well, yeah, otherwise all the rivers would just slip away!) Excellent! Animal-like desire for identifying the patterns (whether they exist or not) is the only straw that you grab on to; it's the only comfort that you can provide to yourself without understanding the real picture. Causality is a drug! Accepting the fact that majority of things happen without any cause would be not suitable for our egocentric minds! That is why you always need to know "what happened?" in order to justify your post factious decision making. And you are instantly satisfied if someone explained to you that "the markets sold off on the European worries!" Planet of the Apes indeed!

Cheers,
MAESTRO

You go ahead and give us one example of one thing that has no cause and that is verifiable empirically. Then we may believe you. Otherwise, we are free to clasiffy you as another troll.

Go ahead, make my day...

 

[rew]

Quote from Nine_Ender:

What utter bs !!! Wow.

Efficient markets actually make prices LESS random then before. If you don't understand this basic fact, its hopeless. If a company makes an additional $1,000,000 over estimate on their quarterly earnings, they are worth $1,000,000 more. An efficient market will add the appropriate amount to the share price to reflect this extra money.

You are the one lacking in comprehension. Of course if a company makes $1,000,000 over estimate its price will spike up. But who predicted that result? The company could have made $1,000,000 less than the estimate (with about the same probability) and then the price would have spiked down.

So, prior to the earnings announcement the stock is priced rationally at the best estimate for the earnings. After earnings are announced the price moves to the value appropriate for the actual earnings. There was no way to predicate the earnings so the size and direction of the move is random.

You simply don't understand "random" as the term is used by finance academics.

 

[Samsara]

Quote from goodgoing:

You go ahead and give us one example of one thing that has no cause and that is verifiable empirically. Then we may believe you. Otherwise, we are free to clasiffy you as another troll.

Go ahead, make my day...

He's not a troll, but a wealthy and successful quant.

But given the claims of insight into the "real picture", likely also a positivist and an adherent of the correspondence theory of truth.

In other words, well advanced only his domain of knowledge but equally in the dark when it comes to epistemology.

 

[rew]

Quote from Samsara:

Look, you're basically just restating the theory. What you're not following is that it's not the <i>tenets</i> of the theory itself that I take issue with, it's the <i>first principles</i> of inquiry upon which it's based. They require XYZ conditions of all market participants (rational expectations, access to information, speed of execution). Yes, the EMH allows irrational <i>behavior</i> to co-exist with rational participants, but that's not the point. Also, I've never seen any account that assumes big money = rational, small money = irrational -- where did you get that from?

Much like how half of all models of market behavior that economists employ implicitly assume a log-normal distribution and then model like crazy off of that, this theory begins by bracketing out reality for a transcendental hypothesis and then proceeds from a top-down basis.

This is why I used the term reification and interjected "all" into your garden variety restatement of the idea. It's an irresponsible hypothesis that was assumed to be a fundamental truth by those who confuse economics with physics (and the lazy), and then went viral.

Well, some small players are rational but the guys who manage multi-billion dollar pensions and the like *have* to be rational. They have the resources to thoroughly investigate any business they invest in, including private meetings with the management and extensive studies of the market. So yes, the big money does on average act more rationally than small investors, many of whom act on stock tips taken off the internet.

Economists use log normal distributions because they're lazy and like easy, tractable math. There are other distributions for random prices that are more realistic but they are harder to work with. So, yes, a lot of theoretical stuff out there should come with a warning tag, "TOY MODEL USED HERE. DON'T USE IT WITH REAL MONEY."

 

[MAESTRO]

Quote from goodgoing:

You go ahead and give us one example of one thing that has no cause and that is verifiable empirically. Then we may believe you. Otherwise, we are free to clasiffy you as another troll.

Go ahead, make my day...

Gravity, Time, DNA, Atoms, your mood swings, dreams, beliefs, desires and millions of other things that have no cause, no reason and no explanation. We have learned to live with all of those things without demanding the answer to the question "WHY?" Have it ever occur to you that any logic attempted to explain more or less complex phenomenon is domed to fail? The life in the uncertainty is not an easy task; it is much more easier to hide cowardly behind the curtain of pretend knowledge and be ready to satisfy yourself providing the reason where the reason simply does not exist.