tag:blogger.com,1999:blog-7905515.post2436502680868960383..comments2024-03-14T11:09:32.759-05:00Comments on Falkenblog: Behavioral Finance in PracticeEric Falkensteinhttp://www.blogger.com/profile/07243687157322033496noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-7905515.post-32209416996525591692009-04-10T06:47:00.000-05:002009-04-10T06:47:00.000-05:00Thanks for the thought-provoking article. Although...Thanks for the thought-provoking article. Although I don't reach the same conclusion as I think you're implying, I do share your concern about the ad hoc nature of many behavioural results.<BR/><BR/>My response: <A HREF="http://www.knowingandmaking.com/2009/04/behavioural-economics-versus-real.html" REL="nofollow">http://www.knowingandmaking.com/2009/04/behavioural-economics-versus-real.html</A>Leigh Caldwellhttps://www.blogger.com/profile/16150868700502562500noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-66531661867304260242009-04-09T12:59:00.000-05:002009-04-09T12:59:00.000-05:00Let's say the alternatives are a) Small Risks ...Let's say the alternatives are <BR/><BR/>a) Small Risks overestimated<BR/>b) SR underestimated<BR/>c) SR under and overestimated <BR/>d) SR priced just right<BR/><BR/>K&T tells us that c) is the case, and that's worth knowing, and it is informative.lancenoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-3528659119726680932009-04-08T17:32:00.000-05:002009-04-08T17:32:00.000-05:00I can tell you now that pair trading is still well...I can tell you now that pair trading is still well and alive. You only need a simple formula to find trades.Jaredhttp://www.pairtradefinder.comnoreply@blogger.comtag:blogger.com,1999:blog-7905515.post-24812102793185650462009-04-08T16:27:00.000-05:002009-04-08T16:27:00.000-05:00You are confusing the absence of arbitrage with th...You are confusing the absence of arbitrage with thought that a Sharpe must be equal to the market sharpe (or Information Ratio=0). These findings are tested in part by their abnormal Sharpes (or information ratios).Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-41897203767572650772009-04-08T14:34:00.000-05:002009-04-08T14:34:00.000-05:001) That is the whole point! Just because prices ar...1) That is the whole point! Just because prices are wrong does not mean that you can create trading strategies with high Sharpes. no free lunch does not imply correct prices... with 3 com and other no where do they say that these were 'behavioral quirks' from which you could make money<BR/><BR/>2) J&T show that raw returns are NEGATIVE but insignificant for 12-36 months, but NEGATIVE and significant for 36-48 months. <BR/><BR/>Btw, there is such a thing as a long term 13-60 month reversal factor: <BR/><BR/>http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/det_lt_rev_factor.html<BR/><BR/>And yes it still holds...Unconventional Wisdomhttps://www.blogger.com/profile/12104938218664853916noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-7040076752266213102009-04-08T12:24:00.000-05:002009-04-08T12:24:00.000-05:00I disagree. The limits of arbitrage says that cap...I disagree. The limits of arbitrage says that capital constraints will prevent arbitrageurs from eliminating these biases. But these anomalies should still allow one to earn a Sharpe ratio (or information ratio) premium by targeting these strategies. <BR/><BR/>As per momentum, In Jegadeesh and Titman's 2001 review of their finding, Figure 3 shows that one generates positive returns when forming a strategy based on the past 12 month returns for up to 48 months. For this to be consistent with their results, the returns from months 36 to 13 months ago must have large effects over the next 36 months, which is implausible.<BR/><BR/>Conrad and Kaul (1993 JoF) showed that DeBondt and Thaler's result was primarily due to rebalancing daily returns. The bottom line is if you look at firms that are tradeable, that do not have biases from large bid-ask spreads, there is no overreaction effect. Their have been no follow ups on this finding. Lack of replication is the greatest refutation.Eric Falkensteinhttps://www.blogger.com/profile/07243687157322033496noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-69199410065639043722009-04-08T12:12:00.000-05:002009-04-08T12:12:00.000-05:00You seem to have misread an article once again. 1...You seem to have misread an article once again. 1) Those are not all 'financial opportunities caused by behavioral quirks', they are examples of limits of arbitrage. They are illustrating idea wrong price does not imply arbitrage...<BR/><BR/>2) Momentum and Over-reaction do not contradict each other. One is a 6 month the other is an 18+ month phenomenon. Perhaps if you had actually read the article you woudl have come across:<BR/><BR/>"Comparing this result to De Bondt and Thaler’s (1985) study of prior winners and losers illustrates the crucial role played by the length of the prior ranking period. In one<BR/>case, prior winners continue to win; in the other, they perform poorly. 25 25 In fact, De Bondt and Thaler (1985) also report that one-year big winners outperform one-year big losers over the following year, but do not make much of this finding."<BR/><BR/>3) Beh finance is not necessarily about finding exploitable opportunities, but explain well known cross-sectional/ times series stylized facts, like the predictability of the BM ratio. But there are funds out there that actively exploit inv biases:<BR/>http://www.fullerthaler.com/Unconventional Wisdomhttps://www.blogger.com/profile/12104938218664853916noreply@blogger.comtag:blogger.com,1999:blog-7905515.post-33292043867818101212009-04-07T21:45:00.000-05:002009-04-07T21:45:00.000-05:00How could one falsify Friedman-Savage?Is there any...How could one falsify Friedman-Savage?<BR/><BR/>Is there any observation that would falsify it?<BR/><BR/>I guess only an observation that the same person was always risk preferring or risk averse, at every scale, right?Michael F. Martinhttps://www.blogger.com/profile/15279501532684851571noreply@blogger.com