6 ms·
Hacking the random walk hypothesis
- dnautics 11y agoI wonder if there's a timescale-dependence of the appearance of randomness here. Subject the data to a series of Gaussian high bandpass filters in Fourier space and repeat the analysis. Does the randomness get higher the higher the frequency?
- aet 11y agoI'm not exactly sure what your asking, but basically randomness in returns decreases as you increase the sampling rate (i.e. annual returns are more normal than say minutely returns). This is due basically to the fact that the more activity happens between measurements. (I could be misunderstanding your question.) High frequency measurements of prices often exhibit regularities that result from the trading mechanism e.g. bid-ask bounce.
- jessaustin 11y agoHow on earth does TFA relate to the Guy-Fawkes-mask-with-star-spangled-bandanna look in the accompanying picture?
- boxy310 11y agoHAXXORS I half believe it to be a branding thing at this point.
- blazespin 11y agoIt's worth noting that its pretty easy to generate data that passes all NIST random tests which is 100% predictable / pseudo random. Eg, just encrypt using AES 256 with the key "predictable" hashed. So, these tests are necessary but not sufficient to prove a random walk hypothesis. The author says as much, but buries this somewhere midway down the article.
- gwern 11y ago> Markets are, quite simply, not random. In the strict statistical sense, no one has ever disputed this... EMH is about excess returns. Of course the market has long-term trends - they go up, because the world is getting richer. Specifically, they go up something like 7% annually in the USA. So if you work with daily returns, your randomness suite had better reject the hypothesis of randomness!
- femto113 11y agoI've always assumed that the randomness of the markets was self-healing: if the markets exhibit non-randomness (and thus become predictable) some arbitrageur will step in and correct it and then some trader will figure out a way to make money against the arbitrage. The best analogy I know of is Rock-Paper-Scissors. The commonly accepted optimal strategy is random, but against a random strategy always choosing rock works exactly as well. It is only if your opponent recognizes the lack of randomness and breaks their own randomness that they can capitalize, at which point you can counter.
- sullyj3 11y agoCommonly accepted optimal strategy? I'd like to see a reference on that one. If always choosing rock works exactly as well, (against a random opponent) in what sense can randomness be called optimal? The key to winning is obviously to determine your opponent's strategy and exploit its weaknesses.