The Physics of Finance: Predicting the Unpredictable
The Physics of Finance: Predicting the Unpredictable
Metadata
- Author: James Owen Weatherall
- ASIN: B00B73VMB0
- Reference: https://amazon.com/dp/B00B73VMB0
- Kindle link
Highlights
short selling may seem crude, but it serves a crucial social good: it helps keep markets efficient. If the only people who can sell a stock are the ones who already own it, people who have information that could be bad for the company often don’t have any way of affecting market prices. This would mean that information could be available that isn’t reflected in the stock price, because the people who have access to the information aren’t able to participate in the market. — location: 1859 ^ref-26285
stocks will tend to return even if they disappear briefly. The classic example is pairs trading. Pairs trading works by observing that some companies’ stock prices are usually closely correlated. — location: 2693 ^ref-41177
Consider Pepsi and Coca-Cola. Virtually any news that isn’t company-specific is likely to affect Pepsi’s products in just the same way as Coca-Cola’s, which means that the two stock prices usually track one another. But changes in the two companies’ prices don’t always occur simultaneously, so sometimes the prices get out of whack compared to their long-term behavior. If Pepsi goes up a little bit but Coca-Cola doesn’t, upsetting the usual relationship, you buy Coca-Cola and sell Pepsi because you have good reason to think that the two prices will soon revert to normal. — location: 2694 ^ref-58741
DIDIER SORNETTE — location: 2841 ^ref-25611
This pattern is called log-periodic because the time between the smaller events decreases in a particular way, related to the logarithm of the time. — location: 3018 ^ref-31901
The methods Sornette has used to identify bubbles and predict when crashes will occur can also be used to identify a situation that Sornette has called an anti-bubble. These are cases in which stock prices are artificially low. On January 25, 1999, for instance, Sornette posted a paper on an online physics archive claiming that, based on his observation of log-periodic patterns in the market data, the Japanese Nikkei stock index was in the midst of an anti-bubble. — location: 3159 ^ref-44558
Correcting this problem led to Osborne’s hypothesis that returns, not prices, are normally distributed. Mandelbrot’s realization that normal and log-normal distributions cannot capture the full wildness of financial markets, — location: 3653 ^ref-9098
