The Possible Inference
May 8th 2007 13:53
The portfolios of 1.5-EW and 701, formed last year and early this year respectively, were a product of the "fundamental technicality" factor employed in picking the stocks, which to date have performed remarkably well. Consequently, an asset pricing model based on the factor was developed, though still in its prototype stage and yet to be proven empirically, but the idea is there that the model could be a proxy for noise trading based on informed decisions of others.
Basically, the market would not be performing efficiently because noise traders based their decisions on the informed mechanism or component of the model and ultimately created more noise in the market by way of chain reaction. However the informed component of the model does not mean it is a market efficient factor but an indication for forming a frame of inference that the future state of a particular stock or the market will reached its efficient point after incorporating and dissipating the noise trading.
Theoretically, the inference is possible but not probable until empirical evidence provides the proof.
Basically, the market would not be performing efficiently because noise traders based their decisions on the informed mechanism or component of the model and ultimately created more noise in the market by way of chain reaction. However the informed component of the model does not mean it is a market efficient factor but an indication for forming a frame of inference that the future state of a particular stock or the market will reached its efficient point after incorporating and dissipating the noise trading.
Theoretically, the inference is possible but not probable until empirical evidence provides the proof.
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