Forum Archive Index - March 2004

["david.gibson" <david.gibson@k.co.nz>]

Stephen,

I think the relevance of the paper is the tools and methods showing the
correlation of factors between the Nikkei 1985 - 1993 and the S&P500 1996 -
2004.  The authors make no claim to having a method to track a deterministic
market - they simply use geophysical techniques to detect signature patterns
of herding behaviour (up or down).

The paper makes a good case that the "herding" behaviour can be detected
from the index time series.  (That the behaviour of the 2 indicies, at
different times, exhibits the same driving "psychology").

Of course, what is of prime interest to investors are the "monster" events -
the turning point between "boom" and 'bust".  The paper makes a good case
that a useful "signature" can be extracted from the time series leading to
an indication that a new pattern of behaviour has begun.

If you are interested in their current predictions:

http://www.ess.ucla.edu/faculty/sornette/prediction/index.asp#prediction

I recognise that their approach is not easy to understand.  (Even figuring
out exactly what they are predicting is not easy to understand!).  However,
I have been following Sornette's papers (and book) since the resources were
pointed out to me by Daniel Vidal.  I am increasingly of the opinion that
they have discovered a very useful market timing method that could improve
on existing market models.

/dbg

-----Original Message-----
From: sharechat-owner@sharechat.co.nz
[mailto:sharechat-owner@sharechat.co.nz]On Behalf Of Stephen Judd
Sent: Wednesday, 24 March 2004 08:08
To: sharechat@sharechat.co.nz
Subject: Re: [sharechat] Condensed Matter Physics and the Stock Market


On Tue, 2004-03-23 at 15:34, david.gibson wrote:
> Found a really great quote in the following paper:
>
> http://arxiv.org/abs/cond-mat/0209065
>
>
> "Individuals with rational expectations predict others? behavior by
> focusing on their external incentives and constraints.  In contrast,
> individuals with adaptive expectations predict others? behavior
> (including possibly the behavior of such an abstract "other" as the
> stock market) by extrapolating from the past".
>
> I posit that this is a fundamental definition of FA and TA?  (An the
> basic reason why the two approaches will never be reconciled).

I was more struck by the predictions made:

"We offer a detailed analysis of what could be the future evolution of
the S&P500 index over the next two years, according to three versions of
the theory: we expect an overall continuation of the bearish phase,
punctuated by local rallies; we predict an overall increasing market
until the end of the year 2002 or at the beginning of 2003 (first
quarter); we predict a strong following descent (with maybe one or two
severe up and downs in the middle) which stops during the first semester
of 2004. After this strong minimum, the market is expected to recover."

Heh.


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