Alphablock

In finance, arbitrage is an essential framework to understand asset pricing. However, the study of anomalies also called as premiums, which are not arbitrageable has led to a debate regarding whether markets are efficient in correcting price imbalances or is inefficiency a reality.

Information is an assumption for modern finance. The Efficient Market Hypothesis uses information to back its case for efficiency. The EMH case is weak, but as Martin Swell (2011) explains until a flawed hypothesis is replaced by better hypothesis, criticism is of limited value.

Momentum and Reversion have always been seen as independent of each other and never as a composite. This study explains how the two behaviors are not only connected but also get transformed into each other.

Natural systems witness reversion and divergence simultaneously across different periods of time. This paper tests the performance proxy as mentioned in a previous paper on the ‘Mean Reversion Framework’ for Markov’s transition probabilities.

The original work by Galton on mean reversion in 1886 emphasized relative before absolute, talked about the relation of the variable with the sample average, pointed out the balance between convergence and divergence and showcased cross-domain expression of mean reversion.

Searching for alpha is searching through inefficiency because there are no supernormal returns in efficiency. This seems intuitive and correct because there is a cost to searching through inefficiency. And agents who spend that cost have to be rewarded for that effort. The case for inefficiency is unassailable.

I really don’t know why Richard Thaler chose this headline for a research paper. Many other behavioral finance academic papers also capture attention. “Can the markets add and subtract?”; “The winner’s curse”; “The gambler’s fallacy”, “Does the stock market overreact?” While the popularity of the subject has increased and behavioral biases have got so pervasive…

Style box for the investor is a visual representation of investment characteristics for stocks, fixed income and mutual funds offered as a comparative tool to investors around the world for helping them determine asset allocations based on their risk preference.