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Alex Matulich wrote:
>If you plot the probability density function of any market, you will
>find it's not gaussian. The distribution has a higher sharper peak,
>and fatter tails, than a gaussian distribution. Therefore markets
>are not random walks.
I think that you can construct random walks with a non-gaussian
distribution, for example a distribution around 0 with a sharper peak and
fatter tails. It is still part of the concept.
The concept of random walks is extended, for example to Brownian motion.
Since really new fundamental information influences prices, the market is
not random. But a lot of people say that the financial markets are efficient
according to the efficient market hypothesis (EMH). I think that the EMH is
the most elegant concept to say: "You can not earn money on financial
markets - there?s no free lunch". The EMH says:
"A capital market is said to be efficient if it fully and correctly reflects
all relevant information in determining security prices. Formally, the
market
is said to be efficient with respect to some information set ... if security
prices would be unaffected by revealing that information to all
participants.
Moreover, efficiency with respect to an information set ... implies that it
is
impossible to make economic profits by trading on basis of [that
informationset]."
(from Campell, Lo, McKinlay: "Econometrics of Financial Markets)
But there are arguments against the EMH:
Kahneman and Tversky said 1979 that people do not behave rational, there are
psychological factors which influence people. Kahneman got the Nobel Price
2002 for his work.
Shefrin and Statman transfered this to the financial market and said that
even traders on financial markets behave according to some psychological
principles, for example the "Disposition Effect".
Odean and a lot of other authors showed that traders do behave according to
the Disposition effect. Even professional traders realize gains to soon and
losses to late.
Shefrin writes in his book "Beyond Greed and Fear: Understanding Behavioral
Finance and the Psychology of Investing" Boston (Harvard Business School
Press) about inefficient markets:
Since the disposition effect and others psychological effects from
behavioral finance exist, the prices and volumes on financial markets can be
different from that what the EMH says. So the markets might be ineffizient!
Vince Heiker wrote:
> If TA can help separate these
> into seasonality, trend and noise in some fashions, then TA is helpful for
> trading. The randomness becomes a bandwidth around the possibly
> forecastable part.
I think this is a great goal, but I think you will get a clear cut between
seasonality, trend and noise. Was the internet hype 2000 just noise?
Probably yes, the new possibilities of the internet were overrated. But this
influenced the real economies and the stock markets. So the bandwith has to
be very big.
Marcus Jellinghaus
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