From: John Conover <john@email.johncon.com>

Subject: Re: Crash, or long "bear" market?

Date: Sat, 25 Jan 1997 23:42:44 -0800

Gregory Keith Mccomb writes: > > Funny, I am no expert on stock markets -- but some initial reading on > stock prices suggests strong evidence that prices follow a "random walk." > Theories abound, for example "technical traders" think they can detect > patterns in the data. But a strong prediction as I have just read seems a > little more like voodoo than economic science. > > Greg McComb, > U of Manitoba. Hi Greg. I agree with you, but if stock prices are a true random walk, (and there is a lot of theoretical and empirical evidence that supports the argument,) then by definition there is no way to detect patterns, since none exist. Any such proposal that implies "timing the market" is ill founded, unless you can forecast the cumulative sum of a random number generator, which is the definition of a random walk. John BTW, there is a good paper on this very subject. It is by the Stanford economist Brian Arthur. It is "Complexity in Economic and Financial Markets", and is available at http://www.santafe.edu/arthur. It references another paper (also authored by him,) "Inductive Reasoning and Bounded Rationality", also at the same URL. Both are good reading. The latest "voodoo" I heard is that years that end in the number 7 are "bear" years for the DJIA, (its not voodoo, it is contemporary numerology.) I plotted the DJIA, and sure enough, for the entire century, it is "true." How does such a curcumstance happen? It would seem like a statistic of astronomical (or economical-the economic numbers have surpassed astronomical numbers in magnitude,) proportions. Actually, if you consider all possibilities of rearranging the DJIA for the years in this century, (all 97 factorial combinations-a large but finite number,) and look at the first 9, or so, years of all the possible combinations, we would expect every 500, or so, in the 97 factorial combinations to have the same characteristics-even if the DJIA was constructed by a random number generator. (Chances are 1 / 2^9 = 1 / 512 that a 50/50 probability of something will align itself all in a row, for 9 things, so every 512 of the 97 factorial combinations, we would expect a "revelation.") The paper by Arthur on inductive reasoning goes into such things, and there a zillions of folks banging on keyboards hunting for revelations. Taken collectively, (aggregately,) the revelations makes the DJIA a random walk scenario-at least according to Arthur. At any rate, if such "patterns" really did exist, they would be arbitraged away once everyone found out about it. P.S., I didn't post this to sci-econ. Go ahead and do so if you want. -- John Conover, john@email.johncon.com, http://www.johncon.com/

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