Book review / Correlation analysis / Matlab, page-6

Hi gann45

Your postings have caught my attention.

I have included some comments below in response to your post:


1) Information leads to randomness
2) A lack of information leads to regularities
I see truth in this. Markets are made by many constituents each with different perception of fair value and in many cases this value is a short term state where an algorithms inputs are met (not an adjustment to a calculated fundamental value).
Typically the dominant trader in any vehicle won’t create the price but gravitate price close to their perception of it.
Based on this It makes sense that with a lack of information price will lead to a price equilibrium (as defined by a lack of random volatility).
This search for equilibrium backs up the theorem that “genuine market trends driven by real information are by nature random”

I find the concept that “After 2 minutes you can not use past information (on this particular day anyway) to predict future returns” challenging as markets can take days or even weeks to reach an equilibrium pricing in new fundamentals.

To the authors portraying the view that “the reason why there is a 2 minute correlation window is because the brokerage costs exceed the available gain”, I would attribute this to the individuals means of determining the mean or ‘fair value’ and the comment could only be applicable to specific vehicles.

I haven’t read this book or any of the links you posted so it may be solid.
As far as taking a view on whether the math is right, based on your summary, for mine, there is a border line between common sense and mathematical explanation. Similar to quantum mechanics explaining that time travel should be possible, It may be the that I don’t have my head around the author’s case but I suspect the gap is that the author is explaining that it takes 2min for the market to find the authors view of equilibrium after news (volatility to drop below x). That said, if this is the case I am still to be brought over the line.

It's good to find someone posting stat views on HC