Book: Fooled by Randomness. By N.N.Taleb.

Fooled by Randomness. The Hidden Role of Chance in Life and in the Markets. N.N.Taleb

A thought-provoking reading. The author definitely enjoys and thrives on expressing a number of well articulated sharp opinions on a number of subjects.

Among other things, Taleb uses a trend-on-top-of-noise model to make the point that larger time scale improves what a natural scientist would call signal-to-noise ratio in the analysis of investment performance. The short time scale is mostly meaningless; the significance of performance record grows with time scale. To quote Taleb: “This explains why I prefer not to read the newspaper (outside the obituary), why I never chitchat about markets, and, when in a trading room, I frequent the matematicians and the secretaries, not the traders. It explains why it is better to read The Economist on Saturdays than the Wall Street Journal every morning (from the standpoint of frequency, aside from the massive gap in intellectual class between the two publications).”

Book: Dynamics of Markets by J.L.McCauley.

Dynamics of Markets. Econophysics and Finance. J.L.McCauley

Econophysics is, very roughly speaking, economics or econometrics done by physicists or done the way physicists — or natural scientists for that matter — would do it. In particular, the emphasis is on quantitative real-life evidence and natural-science-style methods of inference.

On the particular subject of correlations (the little specialty of this site), the author states (Section 3.7) that “liquid markets (stock, bond, foreign exchange) are very hard to beat, meaning that to a good zeroth approximation there are no long-time correlations that can be exploited for profit”. More specifically: “Financial data indicate that strong initial pair correlations die out relatively quickly on a time scale of 10min of trading”.

In our Currency Alpha section we compare this with our own observations.