Thinking Game
July 5th 2007 03:59
We do not know the exact future so we often look at history as a basis for forecasting possible events and outcomes. One of the popular historical reference is pattern searching in which we search for patterns, believing that patterns or cycles repeat itself. Think economic cycle, boom and bust.
Specifically in the field of sharemarkets, historical data plays an important role for researchers and practitioners as a source of forecasting the future, at least in the sense of general direction of the market. But the Efficient Market Hypothesis (EMH) says that it is not possible to earn abnormal returns in excess of the market return because the current asset price already reflected all the relevant information and therefore leaves no room for any increment or decrement of price; hence the absolute fair value.
To a certain degree, the EMH holds ground but as time progress, an increasing number of empirical evidence is giving the EMH and its efficiency cousins a real foundation shake. One of the popular evidence is the momentum strategy which uses historical data to earn some decent returns. At least the evidence of momentum supports semi-strong EMH but leaves a gap that there is some form of information void that could be exploited to the beat the market.
The information void is often searched for by active managers and investors who do not just want to earn the market return. But then again, if the information void came out in the open and then quickly adopted by other market participants, the value of the void will reverse and the opportunity to earn abnormal returns will decrease. Because everyone is crowding a confined space.
'The early bird catches the worm' rings true if you found the void early before everyone else notice it, and when it does, the abnormal return opportunities dissipate which is also time to leave the scene altogether. Can you picture another cyclical chart in your head? It seems that history can repeat itself. A new hypothesis came up to explain the phenomenon which also includes behavioral finance, called the 'Adaptive Market Hypothesis' (AMH).
Karl Marx once said, "History repeats itself, first as tragedy, second as farce." What is the third repetition? Depression?
So when you believe that you have found the 'secret' key then keep it hush unless there is a fantastic deal for your 'secret' strategy. Given the hypothesis and the facts, it really makes one wonder whether all those advertisements shouting the secret to ultimate share trading success and the accompanying 'testimonials' are really true or just another farce.
The market is a thinking game because the outcome is like a game. EMH or AMH? When will it become an absolute theory? When it does, the market is dead.
Specifically in the field of sharemarkets, historical data plays an important role for researchers and practitioners as a source of forecasting the future, at least in the sense of general direction of the market. But the Efficient Market Hypothesis (EMH) says that it is not possible to earn abnormal returns in excess of the market return because the current asset price already reflected all the relevant information and therefore leaves no room for any increment or decrement of price; hence the absolute fair value.
To a certain degree, the EMH holds ground but as time progress, an increasing number of empirical evidence is giving the EMH and its efficiency cousins a real foundation shake. One of the popular evidence is the momentum strategy which uses historical data to earn some decent returns. At least the evidence of momentum supports semi-strong EMH but leaves a gap that there is some form of information void that could be exploited to the beat the market.
The information void is often searched for by active managers and investors who do not just want to earn the market return. But then again, if the information void came out in the open and then quickly adopted by other market participants, the value of the void will reverse and the opportunity to earn abnormal returns will decrease. Because everyone is crowding a confined space.
'The early bird catches the worm' rings true if you found the void early before everyone else notice it, and when it does, the abnormal return opportunities dissipate which is also time to leave the scene altogether. Can you picture another cyclical chart in your head? It seems that history can repeat itself. A new hypothesis came up to explain the phenomenon which also includes behavioral finance, called the 'Adaptive Market Hypothesis' (AMH).
Karl Marx once said, "History repeats itself, first as tragedy, second as farce." What is the third repetition? Depression?
So when you believe that you have found the 'secret' key then keep it hush unless there is a fantastic deal for your 'secret' strategy. Given the hypothesis and the facts, it really makes one wonder whether all those advertisements shouting the secret to ultimate share trading success and the accompanying 'testimonials' are really true or just another farce.
The market is a thinking game because the outcome is like a game. EMH or AMH? When will it become an absolute theory? When it does, the market is dead.
| 40 |
| Vote |
subscribe to this blog