Sunday, December 16, 2007

Beyond the random walk

While I wait to see if many of the recent breakouts can hold up, I went out and bought a book that I found recomended on Stockbee. Before I talk about it I just want to mention how informative and no-nonsense Pradeep Bonde's blog is. I've learned so much about systematic trading by reading his posts and think that his work is what financial blogs should be. If you have not seen it, take a visit and learn something.

The book that I picked up was "Beyond the random walk: A guide to stock market anomalies and low-risk investing", by Vijay Singal. I have become very interested in the development of trading systems and I'm looking to take advantage of any exploitable inefficiency. The book covers many different long-existing anomalies that have resisted any attempts to arbitrage them away.



Most interesting to me were the chapters on short-term price drift and momentum in industrial portfolios. Singal says that short-term price drift is when "events associated with high-quality information signals tend to exhibit price continuations. The quality of the information is characterized by the magnitude of price change, volume, and public dissemination". The momentum in industrial portfolios chapter deals with the evidence that shows that industry groups exhibit price momentum. Singal gives real numbers on well constructed market studies and clearly shows that these price movements are real.

I know that these two inefficiencies are no secret to IBD investors but it is nice to know that the method I choose to study is backed up by empirical evidence.