> 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. > Sorry-- I learned economics at Father Guido Sarducci's Five Minute University. He issued degrees after teaching in five minutes (including spring break and grad pictures) what an average university student > remembers five years after graduating. (Saturday Night Live skit) :) > When Jose offered an example of Hillary’s trading and it was dismissed out of hand by Raul because she is a politician—I mentioned the 1987 crash hoping it could lead to a discussion of how that was interpreted by the EMH theory. Right, but her record is her record regardless of how she might be characterized; he, eventually, got it, > > Ultimately that is beside the point, regardless of one's perception on the > > article's unbiasedness or bias in one direction or another, her trading > > record stands (unless one is prepared to assume that herself, the IRS, the > > Chicago Mercantile Exchange, the New York Times, the Wall Street Journal, > > etc. were jointly conspiring to fulfill some mysterious nefarious purpose). > > > Fair enough. at least to some extent. > 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? > 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. 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. > 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 :) On Sun, Aug 18, 2019 at 10:24 PM Donna Y <dy...@sympatico.ca> wrote: > >> The idea that one cannot beat the market can be traced back, at least > (and > >> probably even earlier), to Louis Bachelier who in his Théorie de la > >> Spéculation dissertation (1900) wrote "the mathematical expectation of > the > >> speculator is zero" (in French, of course). > > Yes, it was probably said ever since the first formal stock exchange > founded in 1602 by the Dutch East India Company. > > What is different about what Fama said was that nobody can get an edge > because prices are always accurate, all the time. > > I don’t have any background in this—I was following your discussion and > tried to determine the origin of the Efficient Market Hypothesis because it > seemed out of whack to me. > > Sorry-- I learned economics at Father Guido Sarducci's Five Minute > University. He issued degrees after teaching in five minutes (including > spring break and grad pictures) what an average university student > remembers five years after graduating. (Saturday Night Live skit) > > For economics, he says it’s just two words--supply and demand. That’s it. > > In a financial market stock prices and volumes traded depend on supply and > demand. An equilibrium price is a balance of demand and supply > factors—equilibrium is where demand and supply curves intersect. More > orders to buy than offers to sell—the price will rise. > > ------ > > When Jose offered an example of Hillary’s trading and it was dismissed out > of hand by Raul because she is a politician—I mentioned the 1987 crash > hoping it could lead to a discussion of how that was interpreted by the EMH > theory. I viewed it as a strong example where EMH did not hold. > > BTW it just occurred to me that the first APL program I wrote in the early > 70’s was to make trading decisions (fees, price target, stop loss) for > penny stocks for a co-worker who was gambling on mining shares (think of > Bre-X that went from 30 cents to $280 after a man falsified assay values > and before he fell out of a helicopter and/or disappeared.) My colleague > did well using my program, increasing his initial investment 160% in a > year--not nearly as good as Hillary. > > ----- > > By Fama’s definition: A market where prices always reflect available > information is called efficient. > > This is tested at three levels (my short hand) > > Weak: just public historic data > Semi strong: both historic data and new information about such events as > earnings, dividends, stock splits, mergers & aquisitions > Strong: both public and private information (I said insider information > for private information not available to all) > > > Here is the actual quote from the paper I paraphrased > > > > Weak Form EMH: Suggests that all past information is priced into > securities. Fundamental analysis of securities can provide an investor with > information to produce returns above market averages in the short term, but > there are no "patterns" that exist. Therefore, fundamental analysis does > not provide long-term advantage and technical analysis will not work. > > > > > Semi-Strong Form EMH: Implies that neither fundamental analysis nor > technical analysis can provide an advantage for an investor and that new > information is instantly priced in to securities. > > > > Strong Form EMH. Says that all information, both public and private, is > priced into stocks and that no investor can gain advantage over the market > as a whole. > > > Several papers argue that for insiders the stock market is not > efficient--insiders have information that is not reflected in prices. > > Several papers demonstrate how information in the form of announcements is > 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 have been trying to figure out more on EMH and it seems to me that Fama > dismisses anything that challenged EMH as unimportant noise. > > If stocks take a random and unpredictable path that would make all methods > of predicting stock prices futile in the long run. A random walk model > predicts that all future values will equal the last observed value. > > Fama found that stock price changes did not follow a truly random > walk—instead there was a positive correlation between the dividend yield > (dividend to stock price ratio) and long-term expected returns. > Nevertheless he deems that unimportant. > > However that doesn’t persuade him against a random walk model. > > If the things that fluctuate are not correlated at all with one another, > then it's demonstrable that the distribution will be a bell shaped curve. > The S&P 500 fluctuations—if they were Gaussian, would be pretty much > constrained to plus or minus 5 standard deviations. > > However, in a financial market, everything is correlated. And you can have > a flash crash or other rare events that can be 100 deviations. There are a > lot of different rare events. Lehman Brothers collapsed, Merrill Lynch sold > itself to Bank of America, and AIG ran out of cash—all in one weekend. As > things went from bad to worse Alan Greenspan characterized the crisis as a > once-in-a-century credit tsunami. (At the time the S&P500 had suffered > eight peak-to-trough declines of more than 20% since the mid-1920s.) > > The biggest influence on stock prices is the movement of the whole > market—just review what happened last Friday with all prices practically > moving in tandem. > > The CAPM pricing model assumes that returns follow a normal, or > bell-shaped, distribution. > > The Black- Scholes model assumes that returns follow a lognormal > distribution. > > In the early 1960s, Benoit Mandelbrot, a mathematician teaching > economics at the University of Chicago, was advising a doctoral student > named Eugene Fama. Mandelbrot had developed a statistical model for > percentage changes in the price of cotton that had “fat tails.” That is, > the model assigned nontrivial probabilities to large percentage changes. > > > > > > > The standard theory of price variation assumed continuity, but the data > were very discontinuous. > > > > Fama concluded that the independence assumption of the random-walk model > seems to be adequate > > > a situation where successive price changes are independent is consistent > with the existence of an "efficient" market for securities, that is, a > market where, given the available information, actual prices at every point > in time represent very good estimates of intrinsic values. > > > > > The fact that there are a large number of abrupt changes in a stable > Paretian market means that such a market is inherently more risky than a > Gaussian market. The variability of a given expected yield is higher in a > stable Paretian market than it would be in a Gaussian market, and the > probability of large losses is greater. > > > > This is the rather convoluted paper: > > > http://static.stevereads.com/papers_to_read/the_behavior_of_stock_market_prices.pdf > > Mandelbrot said in an interview with others: > > Indeed, the problem resides in the models. They began more than 100 > years ago in the works of a man named Louis Bachelier. Little is known > about him, but in 1900, he earned a Ph.D. in mathematicswith a dissertation > that put forward a theory of speculation. Unfortunately, his model for > price variation was already very elaborate and I am sure far too > mathematical for his time, so it fell into a black hole. > > > > > Donna Y > dy...@sympatico.ca > > > > On Aug 16, 2019, at 6:38 PM, Jose Mario Quintana < > jose.mario.quint...@gmail.com> wrote: > > > >> It was Fama who idea posited that it is virtually impossible to > > consistently beat the market > > > > The idea that one cannot beat the market can be traced back, at least > (and > > probably even earlier), to Louis Bachelier who in his Théorie de la > > Spéculation dissertation (1900) wrote "the mathematical expectation of > the > > speculator is zero" (in French, of course). > > > >> Weak: the prices of securities reflect all available public market > > information > >> > >> Semi-strong: Additionally prices rapidly adjust to new information > >> > >> Strong: not even insider knowledge can give investors a predictive edge > > > > What I remember is somewhat different (based on the information being > used > > to try to beat the market): > > > > Weak-form - technical analysis (based just on the historical > prices > > of the security). > > Semi-strong-form - fundamental analysis (based on any publicly available > > information). > > Strong-form - analysis based on any available information (public or > > private). > > > >> I tried to offer some concrete examples that it EMH does not hold. > > > > Earlier in this thread, I offered the entire trading record of a former > > first lady in her younger years consisting in achieving a return of 9900% > > return in 10 months. Another one is Goldman Sachs producing a profit > every > > single day of the 63 trading days of Q1 of 2010. > > > > On the one hand, it is not easy to produce consistent attractive > > risk-adjusted excess returns by taking advantage of alleged mispricing of > > any liquid security (e.g., an ETF tracking the S&P500). > > > > On the other hand, it is easy to assert that it is mispriced (without > > specifying whether the security is overpriced or underpriced) and offer > an > > analysis after the fact (market commentators, implicitly or explicitly, > do > > that every business day) which, from my point of view, might be as useful > > as Monday morning quarterbacking; then again, this is the chat forum. ;) > > > > > > > > > > On Tue, Aug 13, 2019 at 4:23 PM Donna Y <dy...@sympatico.ca> wrote: > > > >> I only paraphrased standard definitions for the terms I used—you asked > >> what I meant. > >> > >> information includes data on previous prices, trading volume > >> > >> > >> It was Fama who idea posited that it is virtually impossible to > >> consistently beat the market– to make investment returns that outperform > >> the overall market average as reflected by major stock indexes such as > the > >> S&P 500 Index. > >> > >> This depends on assuming that stocks always trade at their fair market > >> value. > >> > >> Past price performance can’t predict future prices. > >> > >> There are three variations of the EMH hypothesis – the weak, > semi-strong, > >> and strong form– which represent three different assumed levels of > market > >> efficiency. > >> > >> Weak: the prices of securities reflect all available public market > >> information > >> > >> Semi-strong: Additionally prices rapidly adjust to new information > >> > >> Strong: not even insider knowledge can give investors a predictive edge > >> > >> Exploitable opportunities should not exist in an efficient market. in > >> efficient markets, investors can- not earn a risk-weighted excess > return. > >> > >> In efficient markets, available information is already incorporated in > >> stock prices. > >> > >> > >> > >> I tried to offer some concrete examples that it EMH does not hold. > >> > >> The equivalency of P and NP is one of the seven problems that the Clay > >> Mathematics Institute will give you a million dollars for proving — or > >> disproving. > >> > >> Maybe it would be more profitable to focus on that. > >> > >> > >> > >> Donna Y > >> dy...@sympatico.ca > >> > >> > >>> On Aug 13, 2019, at 2:24 PM, Raul Miller <rauldmil...@gmail.com> > wrote: > >>> > >>> On Mon, Aug 12, 2019 at 7:39 PM Donna Y <dy...@sympatico.ca> wrote: > >>>> Outperform the market or beat the market--the security will produces > >> higher returns, for a given timeframe than the major market indexes. > >>> > >>> Higher than what? Higher than the average? That happens all the time. > >>> Higher than the maximum? That's silly, especially if your performance > >>> is the current maximum. > >>> > >>>> The Efficient Market Hypothesis, or EMH, is an investment theory > >>>> that share prices reflect all information thus theoretically, > >>>> neither technical nor fundamental analysis can produce risk-adjusted > >>>> excess returns thus impossible to outperform the overall market > >>>> through expert stock selection or market timing. > >>> > >>> What's "all information"? > >>> > >>> If it's "all available information" then the claim is meaningless, > >>> since any information that's being ignored can be said to be "not > >>> available". > >>> > >>> If it's really "all information" then it's "meaningful but silly", > >>> because neither people, nor markets are omniscient. It is something a > >>> sleazy salesman might claim though, when he really doesn't have any > >>> clue what he's talking about. > >>> > >>> Thanks, > >>> > >>> -- > >>> Raul > >>> ---------------------------------------------------------------------- > >>> For information about J forums see http://www.jsoftware.com/forums.htm > >> > >> ---------------------------------------------------------------------- > >> For information about J forums see http://www.jsoftware.com/forums.htm > >> > > ---------------------------------------------------------------------- > > For information about J forums see http://www.jsoftware.com/forums.htm > > ---------------------------------------------------------------------- > For information about J forums see http://www.jsoftware.com/forums.htm > ---------------------------------------------------------------------- For information about J forums see http://www.jsoftware.com/forums.htm
