Archive for the ‘Research Papers’ category

End of Behavioral Finance

endofbihavioralfinance

I really don’t know why Richard Thaler chose this headline for a research paper. Many other behavioral finance academic papers also capture attention. “Can the markets add and subtract?”; “The winner’s curse”; “The gambler’s fallacy”, “Does the stock market overreact?” While the popularity of the subject has increased and behavioral biases have got so pervasive that everybody seems to be biased, the question is whether the behavioral finance experts are bias free?

Deviation

Behavioral finance is a subject built around price anomalies. Anomaly is a deviation or departure from the normal. Prices tend to deviate from normal most of the time. Markets tend to overvalue or undervalue asset prices more often than staying at fair value. So whether it is stock markets diverging from the real economy, performing sector diverging from an underperforming sector, it all boils down to divergence. This idea of deviation, departure or divergence can be extended from markets to nature. A low paying job vs. a high paying job, lot of rain compared to drought, magnetic anomalies, divergences are all over the place.

Are these deviations different?

Well statistically speaking; no. But psychologically speaking; yes. It’s not the task of behavioral finance experts to look for transcending rules across areas of study be it psychology or nature. Many time thinkers are so focused on “pattern seeking” that the big picture eludes them. And whose job is it anyway, to look for common rules across nature? Even Mandelbrot, who could have pushed himself for connecting diverse areas, concluded that it was all geometry, there was no law. I disagree with Mandelbrot and the Behavioral school of thought. I am with the statisticians. They are the one who look at deviations, departures as errors and they are the ones who identified that fat tails were more normal than irregular. So if diversions are a reality across nature, than is behavioral finance not getting ahead of itself by basing every stock market departure as owing to psychology and ignoring rest of the natural divergences?

The academic paper in question…

To read the complete article visit Business Standard or subscribe to the Time Triads Newsletter

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


India Worst 20

worst (2)

When it comes to investing, there is no doubt that India is more active than passive. Ofcourse the new money, the news channels and internet has taken trading home to my aunt and other South Delhi modern influential decision making house wives. This is all good; the problem is about giving up before you even started. Just because there is no formal induction to stock markets, Reliance does not go up or futures turned out sharper than the kitchen knife should not be the reasons to give up. What if you were using the wrong investing style?

Anything which could be reviewed quarterly and more could be considered passive. This could be academically debated, but we are talking about an investing style evolution and taking investors and investing in India to the next stage. Regarding, what is better “passive” or “active”? Actually it’s more about your risk profile (you are either active or passive, not both). However, historically short term traders are known to underperform intermediate and longer term investors.

In any case with nearly a million Indices globally and more than 30,000 ETF’s worldwide, India’s passive scene is dismally underplayed. We need more passive instruments, if we have to increase market sophistication, liquidity, choices and investor awareness. The new 25 NSE Sector indices was a much awaited initiative. Thinking sectorally is a first step towards passive style investing. More benchmarks could mean more ETFs, which would then become a virtuous cycle. We won’t trade ETFs like we trade NIFTY futures, hence a key passive step.

Why did we not think of passive earlier?…

To read the complete article visit Business Standard or subscribe to the Time Triads Newsletter

Mukul Pal, is a Chartered Market Technician, MBA Finance and a member of the reputed Market Technicians Association (MTA). He has more than a decade of Capital Market experience dealing with derivatives and global assets. He has worked for Bombay Stock  Exchange, multinational Banks and brokerage houses in leading research positions before starting on his own in 2005. He is the President of the MTA Central and Eastern European Chapter.


Mean Reversion Index in Market Efficiency Journal

 

Download the Paper


The Black Crow


Call it a good omen or bad, human beings have associated natural occurrences with events. Though ‘objectivists’ say human beings suffer from illusion and see what they want, reconsideration shows there is more to illusion than just a black crow or swan.

Watching a crow perched outside your window or a black swan (aka rare event) gliding on a lake or on the trading screen are patterns because they repeat, even if rarely. If there was constant crisis we would not connect them to rare events because there would be no precedent for it. Only when the passing comet coincides with a famine is it that we label its next passing as a bad omen. It’s the repetition or the cyclicality of a process that guides society to establish patterns, no matter their frequency.

The point I am making here is that identifying an outlier such as a crow perching itself outside your window and metaphorically connecting it to economics, sensationalising a fluctuation does not make it all objective. At the soul of every pattern is a repetition, a cycle. The pattern keeps repeating because the cycle keeps pulsating. So, if time is at the heart of every pattern, why do patterns sell more than a time cycle? Patterns do offer a story and humans love stories (Shiller in Irrational Exuberance), but is there really an objective reason, which can make cycles more objective and scientific?

To read the complete article visit Business Standard.


The Bayesian Curse

 

The Dreyfus affair was a political scandal that divided France in the 1890s and the early 1900s. It involved the conviction for treason in November 1894 of Captain Alfred Dreyfus. He was sentenced to life imprisonment for allegedly having communicated French military secrets to the German Embassy in Paris.

What happened? In 1906 Dreyfus was exonerated and reinstated as a major in the French Army. He served during the whole of World War I, ending his service with the rank of Lieutenant-Colonel.

How did Dreyfus’s fortune change? Henri Poincare, a respected mathematician cited probability and statistics. He said that undue weightage to new evidence was incorrect and judgment should be made on basis of all other available proofs. He called on the jury to rely on scientific education rather than feelings.

It was much before probability that David Hume criticized against cause and effect. He said that certain objects are constantly associated with each other. But the fact that umbrellas and rain appear together does not mean that umbrellas cause rain. The fact that the sun has risen thousands of times does not guarantee that it will do so the next day. In criticizing concepts about cause and effect Hume was undermining Christianity’s core beliefs.

With Hume’s doubts about cause and effect swirling about, Thomas Bayes began to consider ways to treat the issue mathematically. In any event, problems involving cause and effect and uncertainty filled the air, and Bayes set out to deal with them quantitatively….

To read the complete article visit Business Standard.


Ideas

Plato, one of the first philosophers to discuss ideas in detail.

Scientific Paper Ideas

Tossing the TIME coin
The butterfly effect myth
The econophysics myth
Correlation of worst losers portfolio to universe (winners portfolio)

Social Trends

The New Google (Done)
Generation X - Strauss and Howe

General Ideas

Decision making and TIME  - 17 JULY
Environment and TIME
Open source and TIME
Short History, Long Time

Statistical Paper Ideas

Parrondo’s paradox
Long PE - Short Price and vice versa
Hedge Inefficiency
Pair ineffciency
Statistics and TIME
Beta Cycles
The time exponent
Why is nature exponential?
What is Time Indexing?
What is Randomness?
Growth vs. Value
Sunspot and TIME
What is a PAIR?
Correlations vs Cycles
Cycles vs Inefficiency
The power law in the Fibonacci sequence
Time vs APM

Technical Analysis Paper Ideas

Summation/Hurst/Hierarchy
Explaining the 13 Elliott Patterns with Time Triads
How can TIME TRIADS explain inflation? History of inflation
How can TIME TRIADS explain interest rates? History of interest rates
Introducing time oscillators
The New Vix (Jiseki Character)
What is a market leader?
Why does an oscillator fail?

Mathematical Paper Ideas

Patterns in Irrational numbers
The magic of Euler’s number
Simplifying Fractals - MSET and TIME
Recreating Cantor Set through Time Translation
The intertemporal choice (The story of John Rae)
Avogadro number
Champernowne Sequence


The Time Topology

 

Human studyof scale invariant natural patterns invariably stops at Pareto exponentiality. US scholar Albert Bartlett pointed out the difficulty to grasp ramifications of exponential growth, stating: “The greatest shortcoming of the human race is our inability to understand the exponential function”.

This paper summarizes the philosophy of Time Topology and builds a historical and statistical case to explain that just like patterns in natural systems even Time is patterned. This on one side looks plausible but on the other leads us to a critical Cartesian debate because Time is the common (x-axis) element against all the other natural (Y- axis) systems. Patterns can’t exist on both the Cartesian levels. This would mean that either Time (the only patterned element) gives (order and disorder) pattern to all natural systems or there is some other mysterious force or just patterns and no mystery (Mandelbrot).

Download the paper from SSRN


Limits to arbitrage?

 

Behavioral finance used mean reversion cycles to challenge the classical economics (21 Apr article), but preferred to explain mean reversion through sentiment and not ‘Time’. We can’t expect Markowitz and Fama to open up this fissure and crack the dam open and fight back, because not only this means that they have to accept that classical economics failed to answer more than a few questions, accept that the finance we are still taught at ivy league could be far from complete, undo 100 years of research and only then can there be a new academic war.

The new fissure (weak argument) behavioral finance has is that though there is a limit to what can be arbitraged and inefficiencies can last longer, price reversal happen every 2-3 years. So what the practitioners say is that on a large time frame arbitrage is possible (buying the worst 3 year losers and selling the best 3 year performers) but not on small time frames. Even this time they explain how it’s the sentiment and investor profile that is to be blamed. Because investors are loss averse they over-react pushing losers lower. Investors also suffer from under-reaction. This is the reason momentum continues and tops extend. The over-reaction and under-reaction takes years to unwind.

Above this…

This article was written for Business Standard

To read this article and for regular updates on behavioral finance subscribe to Orpheus Research Time Triads Update.

Time Triads, Time Fractals, Time Arbitrage, Performance Cycles are terms coined by Orpheus Research. Time Triads is our weekly market letter. The report covers various aspects on TIME patterns, TIME forecast, alternative research, emerging markets, behavioral finance, market fractals, econohistory, econostatistics, time cyclicality, investment psychology, socioeconomics, pop cultural trends, macro economics, interest rates, derivatives, money management, Intermarket trends etc.

 


Divergence Cyclicality on SSRN

Time Triads, Time Fractals, Time Arbitrage, Performance Cycles are terms coined by Orpheus Research. Time Triads is our weekly market letter. The report covers Time Cycles on global assets and forecasts. The report uses alternative research techniques to study emerging markets and carries updates on behavioral finance, market fractals, econohistory, econostatistics, investment psychology, socioeconomics, pop cultural trends, macro economics, interest rates, derivatives, money management, Intermarket trends etc.

Time Duration Decay in Emerging Markets Journal

Time Triads, Time Fractals, Time Arbitrage, Performance Cycles are terms coined by Orpheus Research. Time Triads is our weekly market letter. The report covers Time Cycles on global assets and forecasts. The report uses alternative research techniques to study emerging markets and carries updates on behavioral finance, market fractals, econohistory, econostatistics, investment psychology, socioeconomics, pop cultural trends, macro economics, interest rates, derivatives, money management, Intermarket trends etc.