Short Time Frames Losing Their Edges?
- Thread starter Corso482
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The question has to be posed in the context of the size of inefficiencies. It's very unlikely that one can find a huge inefficiency within a short time window (e.g. intraday) as scale effects would be dramatic. Thus, almost by definition, all the really large inefficiencies exist in longer time frames. Which lead to another question of whether they are inefficiencies or not b/c to be such, they have to provide <b>abnormal</b> returns which assumes you have a model for <b>normal</b> returns. At the current state we don't. The existing models are far from perfect and their imperfections quickly get compounded as the time frame gets longer. Thus, the joint-hypothesis problem - if you are finding long run inefficiencies, it's conditional on your assumption that the model of normal returns you used is correct (which is highly arguable.)
so all these professors customarily have a oh, say, 20, 30 ES contracts out while teaching their classes right? of course, they're not all that interested in the money, they really love the teaching, but hey, why not make a few hundred thousand a year on top with a few simple predictions right? it's child's play....
No it's not child's play and yes, some of them do have contracts open while they teach. I know of at least two at this university that trade actively. I'm not a professor yet, but I often give my students a quiz and check the action in the meantime, add/close a position here and there etc. So I don't see your point.
Besides, you misunderstood mine. Although this task might not be easy, the theories provide the tools to better understand and use the action. Check out, for example the article by Daniel, Hershleifer and Subrahmanyam, Journal of Finance 1998, I think (not sure of the date), they provide a unified theory that explains overreaction and underreaction across different time frames and how it relates to whether the information people react to is private or public. Unless what you are using for trading is grounded in sound economic theory, it has a high probability of being spurious. At least you can't tell if it is. I'm not sure about you, but I'd rather trade something that is not just a result of mindless data mining but is rather based in solid economic principles and thus is more likely to persist.
Cheers.
Wouldn't you like what you find to be <b>statistically</b> reliable? Unless the pattern or whatever you wanna call it is reliable statistically, how the heck do you know it's stable?
"Occurs again and again" is alternative to being statistically significant.
Yes, indeed statistics can be misused if need be, but that is usually done to mislead others, not the researcher.
that's right vlad. hire your monkies and hand em the darts folks, it's time to go portfolio pickin...
let's just have a quick look at the lucrative returns promised to the index buy and holders:
buy SP500 Jan '62 @ 70
sell SP500 Jan '82 @ 120
throw in a generous estimate of a 4% dividend and you've got a smashing return of....wait for it.....6.7%pa woohoo!
but wait -- let's factor in inflation for the period, which was 5.5% pa, and you've got yourself a meaty return of 1.2%!
what does EMH tell us again? no one can outperform the indices for any 'signifcant period of time'?
well, i don't know about you, but i'd consider 20 years a 'significant period of time'.
therefore, it was humanly impossible to achieve a return better than 1.2% pa from 1962 - 1982.
Vlad we and others got into this in detail on another thread, and you pretty much conceded the emh hypothesis can not deal with real market situations like the bubble in the Nasdaq. Now if the theory can not deal with the real world ....
Part and parcel of why emh has had to evolve over the years is that it is really liquidity that drives the market. Why do you think everyone in the fund business keeps track of fund inflows and outflows. Finally, if there are only about 40 decision makers who influence price in the short run, how can anyone claim they are emh actors. Do you think greenspan and the fed are emh followers. Do you think the guys at Fidelity say hold it we do not want anymore money coming into our funds because the market is overpriced based on our models. We refuse to invest in the market. Please do not send us anymore money. No they say hey look the Janus twenty just brought in 2 billion, lets get on board those stocks and run em up to high heaven because that is the way to match the performance of the S&P. EMH has so little to do with real Wall Street it is a amazing that people buy into it. How can academics have such a strong faith in a theory that can not be proven. It reminds me of their faith in in other theories.
By the way I have a friend who worked at the Prediction company, you know those chaos theory professors who were once Los Alamos guys. They pretty much made mince meat of the emh theory. (My friend also sports the serious academic and scientific credentials but does trade for a living)
In my opinion EMH can only be saved by redefining it every few years and saying well we made exceptions for that circumstance in this paper published here but in general it is still a good theory. Again my rebuttal is Nasdaq 5000 to about Nasdaq 2000 in a very short period of time. Not rational, not efficient but very real.
Part and parcel of why emh has had to evolve over the years is that it is really liquidity that drives the market. Why do you think everyone in the fund business keeps track of fund inflows and outflows. Finally, if there are only about 40 decision makers who influence price in the short run, how can anyone claim they are emh actors. Do you think greenspan and the fed are emh followers. Do you think the guys at Fidelity say hold it we do not want anymore money coming into our funds because the market is overpriced based on our models. We refuse to invest in the market. Please do not send us anymore money. No they say hey look the Janus twenty just brought in 2 billion, lets get on board those stocks and run em up to high heaven because that is the way to match the performance of the S&P. EMH has so little to do with real Wall Street it is a amazing that people buy into it. How can academics have such a strong faith in a theory that can not be proven. It reminds me of their faith in in other theories.
By the way I have a friend who worked at the Prediction company, you know those chaos theory professors who were once Los Alamos guys. They pretty much made mince meat of the emh theory. (My friend also sports the serious academic and scientific credentials but does trade for a living)
In my opinion EMH can only be saved by redefining it every few years and saying well we made exceptions for that circumstance in this paper published here but in general it is still a good theory. Again my rebuttal is Nasdaq 5000 to about Nasdaq 2000 in a very short period of time. Not rational, not efficient but very real.
Not sure what your source are, they certainly conflict with what I've seen.
Edit: The figure I gave does not imply that's what you will realize in any given year, naturally. And yes, there are periods where it may not give a lot, like the one you bring to light. In highsight everyone is Warren Buffet.
I can similarly pick a subperiod of your own trading when you sucked and say, look you could have done better just sitting on cash! :eek: