Donna Y [email protected]
> On Aug 21, 2019, at 7:57 PM, Jose Mario Quintana > <[email protected]> wrote: > >> What is different about what Fama said was that nobody can get an edge > because prices are always accurate, all the time. > > However, if Bachelier's "the mathematical expectation of the speculator is > zero" statement holds for a market then, literally, the expectation is that > the speculator cannot outperform that market. Yes Bachelier described a random walk—here the random movements tend to average out—random variables become normally distributed when the number of observations is sufficiently large. See also Einstein’s paper from a few years later on Brownian motion—how he showed how to measure atoms and molecules from they moved microscopic particles in water or the atmosphere. (moved by random movement not thermal currents which would not be random. Fama built EMH on the random walk model. Whole new financial industries were built and Noble prizes were awarded. He did not listen to his mentor Mandelbrot when it was inconvenient. Mandelbrot speaks of Joseph effects and Noah effects . Joseph Effects: These are persistent. > Joseph predicted seven fat years and seven lean years, events in a time > series are highly dependent on what precedes them. Noah Effects: These create discontinuity. A storm comes and blows everything away. These kind of effects occur in any system with feeds back. We can’t predict these events. But we can’t ignore them. > > >> My colleague did well using my program, increasing his initial > investment 160% in a year--not nearly as good as Hillary. > > Do you know what happened afterward? Did he retire from the markets as a > clear winner, as she did? Unfortunately he went to another company—thus he stopped using the program because he didn’t have access to an APL terminal any more. Later I transferred for Montreal to Toronto and we lost touch. > >> incorporated into prices in short order. Therefore I don’t know why the > author of “the paper of which you are fond” chose the weak rather than > semi-strong form. I lost track of the name and link to the paper—thanks for providing it again. Thanks, I understand this but thought the author was trying to prove EMH—see my earlier reply to Raul. > > Recall, the information related to the three forms is nested: > > Weak - Past Prices (and Volumes) < Semi-Strong - All public Information > < Strong - All Public and Private Information > > So, if one falsifies the Weak form then necessarily follows that the > Semi-Strong and Strong forms are also falsified. How can one falsify the > Weak form? By consistently outperforming the market (on a risk-adjusted > basis) using a trading strategy based only on past prices (and perhaps > volumes) or, in principle, by assuming that this is not possible and find a > contradiction. Unfortunately, if one succeeds only using the latter > approach is akin to say: I am sure that one can outperform the market > consistently but I have no idea how it can be done. > > The paper, > > Markets are efficient if and only if P = NP > https://arxiv.org/pdf/1002.2284.pdf > > is, in my opinion, an interesting one. > > However, at least a couple of us (one of which is a CFA) are very skeptical > of all hype being associated to it in this thread; not to mention > the authoritative statements such as, (the paper) "shows that even the weak > EMH > is mathematically implausible" which is baffling at best. > >> A random walk model predicts that all future values will equal the last > observed value. > > Depending on what someone's concept of "predicts" might be, the phrase > above could induce a misconception. One form to present it is as follows: > a random walk model stating that the sequence of (discounted) security > prices is a martingale would support the weak-form of the EMH. Sorry—my only experience with Martingale gambler. There was a rogue trader that worked for a bank where my friend was on the board of directors and the audit committee—I was visiting her just before this came to light and trying to convey to her that there was criminal actions behind the 2008 crash (in some places) and it was not appropriate for her to advise banks to simply write off losses—pass off losses—and leave perpetrators free. A few days after I returned home the trader came forward to admit what he had done—he’d been doubling his investment after every loss, so that the first win would recover all previous losses plus win a profit equal to the original stake. He booked fictitious hedging trades in order to hide the fact that he was exceeding his risk limits. A market selloff caused trades to lose money and potential losses hit $12 billion. The bank’s market capitalization fell by $4.5 billion. > >> This is the rather convoluted paper... > > I appreciate your research, I almost had forgotten that paper, I read it > three decades ago but I enjoyed reading it again. Thank you :) What I got from this paper by Fama was that he chose to ignore what his mentor advised him about very early in the development of EMH—the main purpose the EMH served was to justify passive management of investment funds. ---------------------------------------------------------------------- For information about J forums see http://www.jsoftware.com/forums.htm
