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Posts: 261
Joined: July 2nd, 2006, 5:35 pm

### Financial theory: fresh or stagnant?

QuoteOriginally posted by: UnderTheRadarBTW, the discussion on EMH and finance theory has progressed since Fama (1970, 1991). The issue with EMH is not 'are markets efficient or inefficient?' but rather the discussion of EMH has moved on to 'how efficient or inefficient are markets?'. Most finance academics and professionals worth their salt discuss EMH in the new paradigm, however, you do find some people still believing that the world is flat.Well, yes, and the field which discusses this question is called Behavioural Finance. Efficiency as a term is somewhat misleading, because the function of credit lending is to earn interest, nothing more. Most investors are indifferent whether their interest comes from an increase in fundamental value of the asset or not. People were perfectly happy when their tech-stocks gained 100% although there could not have been good rational assumptions which could have justified this investment.And of course investment decisions are much more complex than choosing between 100 assets or so. There are millions of possiblities and nobody has time to check them all. Why shouldn't I invest in Japan Small Cap right now? There is no simple formula which can decide this problem. This decision is probably as hard as any decision could get.If there was a System which could make perfect investment decisions it would gain thousands of % per year.
Last edited by yabbadabba on February 1st, 2007, 11:00 pm, edited 1 time in total.

wolf87
Topic Author
Posts: 29
Joined: August 17th, 2006, 9:37 pm

### Financial theory: fresh or stagnant?

QuoteOriginally posted by: yabbadabbaQuoteOriginally posted by: UnderTheRadarBTW, the discussion on EMH and finance theory has progressed since Fama (1970, 1991). The issue with EMH is not 'are markets efficient or inefficient?' but rather the discussion of EMH has moved on to 'how efficient or inefficient are markets?'. Most finance academics and professionals worth their salt discuss EMH in the new paradigm, however, you do find some people still believing that the world is flat.Well, yes, and the field which discusses this question is called Behavioural Finance. Efficiency as a term is somewhat misleading, because the function of credit lending is to earn interest, nothing more. Most investors are indifferent whether their interest comes from an increase in fundamental value of the asset or not. People were perfectly happy when their tech-stocks gained 100% although there could not have been good rational assumptions which could have justified this investment.Wouldn't work on market microstructure and rational herding also fall under this new paradigm? It seems like these areas and behavioral finance all explore why markets behave inefficiently or irrationally; it's a question of which assumptions you choose to discard.

Posts: 261
Joined: July 2nd, 2006, 5:35 pm

### Financial theory: fresh or stagnant?

I absolutely agree. One should get rid of the terms efficient and rationality, because people don't work this way and they have very good reasons for it (limited time and knowledge). Herding is studied in BF, but I doubt that results from group behaviour studies are used. I think the investigation of microstructure is a subset of marketstructure in general.
Last edited by yabbadabba on February 1st, 2007, 11:00 pm, edited 1 time in total.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

### Financial theory: fresh or stagnant?

QuoteOriginally posted by: KackToodlesQuoteOriginally posted by: madmaxDo you know how much they pay ? Because I have been told that they pay higherI don't know how much they pay. I seriously doubt they pay higher (unless you are one of the high up indispensible managers). Think about it: if you're an entry level quant and you have bulge bracket bank offers on wall street, why would you go to work at rentec?You're not in the same league as Simons. You and twophish know nothing about QF. You're just a couple of blowhards.One more time...QuoteMark Silber, chief financial officer of US-based Renaissance Technologies, said: "By the end of the year, the investors in Medallion will be entirely comprised of affiliates of Renaissance Technologies, meaning employees, ex-employees and their family members." The fund, which has been running for almost 20 years and was described by investment consultant Jacob Schmidt as the most successful hedge fund ever, has generated annualised net investment returns of 34.2% a year since inception in 1988, according to an investor. Silber said it had made 27.2% for the first 11 months of 2005, the most up-to-date figure available. The net return is stated after management fees of 5% and performance fees of 44%. These fees are significantly higher than the 2% and 20% typically charged by hedge funds. A large portion of the fees go to Renaissance Technologies' employees, whom the firm has allowed to invest in the Medallion fund. Jim Simons, the firm's founder and president, is believed to have $2.7bn invested in Medallion, according to hedge fund sources. The firm has kept down the size of the fund by returning capital to external investors. Silber said: "We have been giving money back for several years because we have capacity constraints, we don't want to reduce returns." Medallion, which relies entirely on computer systems to identify pricing anomalies, switches in and out of positions within a day, and transaction costs limit its size. Renaissance Technologies in August launched a separate fund with a capacity it estimates at$100bn, which would make it the largest hedge fund in the world. The new fund may hold positions for up to 10 years, according to rival quantitative hedge fund managers, and is targeting a return of 3% or more a year above the S&P 500.They are the elite of the elite of the elite in Hi freq trading. They know how to make money (unlike you).
Last edited by TraderJoe on February 2nd, 2007, 11:00 pm, edited 1 time in total.

Posts: 261
Joined: July 2nd, 2006, 5:35 pm

### Financial theory: fresh or stagnant?

QuoteOriginally posted by: TraderJoeThey are the elite of the elite of the elite in Hi freq trading. They know how to make money.Yes, but that wasn't the question, was it? So do these guys use methods completely unheard of or are they just smart enough putting everything together? Is there a financial theory for Hi freq trading?

flairplay
Posts: 130
Joined: September 26th, 2006, 1:34 pm

### Financial theory: fresh or stagnant?

QuoteThey are the elite of the elite of the elite in Hi freq trading. They know how to make money (unlike you).Some sentence. And some degree of reverence and admiration. I would have thought elite would have sufficed - though perhaps being half of Chern-Simons is more of an achievement than making money later on.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

### Financial theory: fresh or stagnant?

QuoteOriginally posted by: yabbadabbaQuoteOriginally posted by: TraderJoeThey are the elite of the elite of the elite in Hi freq trading. They know how to make money.Yes, but that wasn't the question, was it? So do these guys use methods completely unheard of or are they just smart enough putting everything together? Is there a financial theory for Hi freq trading?Yeah there is - but I'm not telling you .

lewishortthemall
Posts: 48
Joined: January 10th, 2007, 6:58 pm

### Financial theory: fresh or stagnant?

The first pillar of high-frequency finance is secrecy ,the second pillar is the absolute and unconditional respect of the first one ...
Last edited by lewishortthemall on February 3rd, 2007, 11:00 pm, edited 1 time in total.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

### Financial theory: fresh or stagnant?

Indeed .

torontosimpleguy
Posts: 1011
Joined: July 12th, 2004, 5:51 pm

### Financial theory: fresh or stagnant?

I tend to think "they" use some simple transactions to make money and the rest of "high-frequency" is just a noise to mislead imitators.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

### Financial theory: fresh or stagnant?

And who are you?

torontosimpleguy
Posts: 1011
Joined: July 12th, 2004, 5:51 pm

### Financial theory: fresh or stagnant?

QuoteOriginally posted by: TraderJoeAnd who are you?At least I'm able to analyze situation distinct from someone like you. First, if I were "them" I would try to conceal my strategy. Second, it's impossible to exploit market inefficiency so long unless you found some really "stupid" discrepancy hidden from others. Third, you can't do it with a complicated model since (a) you have to teach others to work with your model and it ultimately creates a leak; and (b) current models are very rough approximations that require constant manual tuning, which cannot be organized for commercial high-volume use.So this is why I came to aforesaid conclusion.

Posts: 11048
Joined: February 1st, 2005, 11:21 pm

### Financial theory: fresh or stagnant?

How do you know they don't use a constantly eveolving strategy?

torontosimpleguy
Posts: 1011
Joined: July 12th, 2004, 5:51 pm

### Financial theory: fresh or stagnant?

QuoteOriginally posted by: TraderJoeHow do you know they don't use a constantly eveolving strategy?I don't believe it's possible by using some empirical ideas.You need to develop a theoretical framework. It requires years of analytical studies and practical verifications. It's like to develop nuclear bomb single-handedly. In my opinion it's impossible.

quantumar
Posts: 164
Joined: March 26th, 2005, 10:26 am

### Financial theory: fresh or stagnant?

I know an affiliate whose friends are working for Rentec, from very little information they gave us for obvious reasons we learned that all they do now is stat arb all over the world, stocks, bonds, currencies....