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Re: Gambling Indicators [Caution-Long reply]



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At 12:53 PM -0400 10/19/98, Timothy Morge wrote:

>I was educated at the University of Chicago. I began in the physics and
>math department and ended up a graduate student in Economics. I've heard
>all of these arguments before. In the mathematics department, the
>statistics classes and the economics department, we again and again were
>taught that the market is random and that the use of indicators and
>'drawing techniques' [chart formations, trend lines, etc.] are not market
>predictors and therefore, are useless.

That was the conventional wisdom for many years. But even respected
professors are changing their minds. I posted the following earlier this
year and it may be worth reading again:


I was just reading an excellent new book by said Dr. Lo, "The Econometrics
of Financial Markets", 1997, It is actually by three authors:

   John Campbell,
      Otto Eckstein Professor of Applied Economics at Harvard Un.,
   Andrew Lo,
      Harris & Harris Group Professor at the Sloan School of
      Management at MIT, and
   Craig MacKinlay, Professor of Finance at the Wharton School,
      Un. of Pennsylvania.

Chapter 2 spends over 50 pages summarizing dozens of technical papers
published in prestigious economic journals that addressed predicability of
the markets and tests of the Random Walk Hypothesis. In the conclusion of
the chapter, Section 2.9, they state:

  "Recent econometric advances and empirical evidence seem to
   suggest that financial asset returns are predictable to some
   degree. Thirty years ago this would have been tantamount to
   an outright rejection of market efficiency. However, modern
   financial economics teaches us that other, perfectly rational
   factors may account for such predictability. The fine
   structure of securities markets and frictions in the trading
   process can generate predictability. Time-varying expected
   returns due to changing business conditions can generate
   predictability. A certain degree of predictability may be
   necessary to reward investors for bearing certain dynamic
   risks. Motivated by these considerations, we shall develop
   many models and techniques to address these and other related
   issues in the coming chapters."


Looks as if these teachers are finally getting the right idea!

Bob Fulks