Re: General Thery seminar

["Ronald Calitri" <calitrir@xxxxxxxxxxxxx>]

Barkley,

About your last post I do not think all that your " manias...insane land
speculation...blind passion...financial orgies [sounds like fun][it is
fun]...frenzies...feverish speculation
...epidemic desire to become rich quick...wishful thinking... turning a
blind eye...people without ears to hear or eyes to see...investors living in
a fool's paradise...easy credibility...
overconfidence...overspeculation...overtrading...a raging
appetite... a craze...a mad rush to spend...sapient nincompoops" that are
all words directed at them selves for having miscalculated their true
positions takes us to the macrodynamics of financial economics. Yes, I know
there is a lot of turnover in those firms; but what you are missing is the
remarks that the bubble-blowers pass between each other: "there goes another
one...got him...even the widows and orphans are buying it...you should have
heard the squeak when my third moment got her second...but then we turned
around and collateralized it back to them they didn't even know" That kind
of economics.

 I now answer your later post then get back to the first
>,Ronald,
       The French and Fama findings are a lot more
ambiguous than you are letting on.  They show
>mean reversion, which means that there is regularly
overshooting beyond what fundamentalist investing
would do, which is then followed by a period in which
fundamentalists are pulling things back toward the
apparent fundamental, so to speak.   Thus, chartists
are regularly shooting prices "too high" or "too low",
after which the fundamentalists get their revenge, as
it were.  This kind of scenario fits with much of the
current complex heterogeneous agent modeling going on.">>
>
The original FF findings I referred to reflect as you say. In more recent
work they add a leverage factor. They are reluctant I suspect to take this
far as developed here, in my perhaps vain attempt to stop blaming everything
on misspecified autocorrelation.


OK- I am sure not to be able to genalize my story at first try but think
there is progress below to help "True" vs "False" stand as a viable and
potentially creative alternative to the standard "Informed" vs "Uninformed"
distinction/dimension

----- Original Message -----
From: J. Barkley Rosser, Jr.
> Ronald,
>       Guess I don't find your "true" versus "false"
> traders story too appealing.  Using these two
> kinds of agents, how do you get a bubble?  Is
> it a particular large positive exogenous shock
> pushing both kinds of traders into buying?  I
> don't get it, I'm afraid.

OK - in a jumble of a few versions of the current story, Faddism creates an
unusually stupid herd that rushes up bluff into the sun. The cliff is out of
sight given the imperfection of the agent's modeling. Their myopias see only
in the indicated direction. So if there are enough herdees when the cliff is
reached, bang. The difficulty emerges when we ask where these monacled
crazies get their money. In the standard story, the shares already purchased
are valuable per price and may be pledged for additional liquidity at same.
This implies either a) myopia is catching, or b) the myopia is
indistinguishable by the credit maker. Case (a) then is the late 1920s and
(b)could be the internet stocks, where a generalized banker might ruminate,
"well it is crazy but I do not know if it is more crazy than everything
else," before lending.

    But, the key to bubble type (a) [mythologically, as I do not believe
even the 1929 crash or that of Russia in 1997 truely destroyed the
"fundamental" value of the things sold, and in the 1929 case many businesses
into the 1960s got free rides on long-expensed capital  stock], is that
wealth may be pledged for liquidity. It is the sudden reversal, from
relatively low to relatively high in terms of the bubble commodity that
brings about the need for its liquidation.
      However, what I am suggesting is a bit different. I believe it emerges
from the property of smoothing enjoyed by solutions in the Ito calculus, and
does not involve as much liquidation of wealth. The "scheme" of the "false"
is to create a deterministic process of borrowing in order to pledge, and
involves either two contra parties or the solitary ability to schedule
expenses and revenues between accounting periods. At each time when a
"true" balance must be cast for the purpose of evaluation, the cash position
is great, the bubble asset is either "sold" forward, or "parked" in the
herd. Two minutes later, in trading time, the balance may be recast the
other way, and the other party (or even previous month's expenses, for that
matter) takes up the burden of cash position for their own purposes, while
the cycling bubble firm returns to the other side of its "false" position.
So, a bubble may progress through internal circulation so long as the
inter-trading parties arrange their balances synchronically. This is
doubtless not a sine/cosine process but has many levels of harmonics or
waveforms.

So,
 >        The fundamentalist/chartist distinction, for all
> its problems, does give us a mechanism for
> dynamics.  Given a perceived fundamental, let it
> be the average opinion of the "well-informed"
> fundamentalist traders, an arbitrarily defined group
> perhaps (and certainly a Keynesian beauty contest
> story); then one can predict behavior of agents.  One
> can easily see fundamentalists and chartists doing
> different things in different situations (fundamentalists
> selling when price is far aboved the "perceived fundamantal"
> while chartists keep buying if price is moving up fast enough).
> This allows for an understanding of market dynamics with
> different ratios of the kinds of traders.

Well, yes, except that the "chartists" are often in practice forced into a
defensive cycling process in order to maintain price above fundamental after
the run-up. I have seen papers on these lasting a couple of years on
individual stocks and have tried to measure such for about nine months of
the US/Mex. exchange rate. But notice the difference in these two examples.
In the case of the stock papers, the "fundamentals" were drawn from a
retrospective financial analysis of the corporation's position, tuned in
academia and posessing accounting measures specially designed to reflect the
company's true position.  In the Mexican case, the underlying process was
identified from a VAR on long past and a bit forward macroeconomic series.

Now, the idea of "fundamental" in the informed/uninformed has the
connotation of the latter instance. That is, to say of the internet, it will
not expand as rapidly as anticipated because - well I dunno - thought radio
will  be invented, a pornography virus that destroys eyeballs will be
discovered too late, the odor of fresh books is found to induce longevity,
and of old books to endow immunity- who knows, but the "fundamental" in each
case is something macroeconomic or conditional about the true eventual
revenue to be obtained. That is "modern" fundamentalism, something I feel
strongly in as part of the age, but that is nevertheless a kind of rotten
back-ended ness in terms of scientific development. Before getting into that
let me point to my friend who just made, I think like $500,000 in an
internet stock option, that guy, gonna bet another horse, gonna do the
"game", again.

Not to pick sides but I see from the late '60s on the one hand, a receptive
but totally sidelined crowd of macroeconomists (who now may claim to "own"
fundamentalism, and on the other hand, the financial scientists, who at that
time were known as "microeconomists", trying to figure from the dividend
rate to some other also active fundamental factor. This they did with  APT
and from that the now-macro fundamentals is spinoff. From inside, the
"fundamental factor" is still composted of series that are nearer the
market.  This explains why the New York Fed papers sometimes seem obtuse to
us.  The  "true-false" distinction on offer here, regarding the cycling of
positions to model market distortions takes "us" a step past "them" further
into "their" world than they are at all willing to go.

>         The literature on this is growing rapidly, but the
> general perception that an increase in the percent of
> traders following chartist strategies destabilizes markets
> and complicates dynamics rather neatly holds

They also sometimes make money in the market because the price sometimes
correctly signals true-false cycles or rather to be correct to the true: the
true do nothing but sell the barn, or swing Paul's swing; it is
false(+)\false(-) cycles that run the tornado.

> I also recognize that there are other traders who are not so
> neatly categorized, complicated program traders working
> for Henry and his competitors; the behavior of whom is
> neither clearly stabilizing or destabilizing, and may in fact
> be locally stabilizing but potentially globally destabilizing
> as the LCTM outcome and the 1987 crash all may show).

I suppose; but I think using the desynchronization of planned balancing
transactions instead of selective madness will also enable sunspots,
lyapunov's acne and minsky's stellar dynamics and is better for carrying
what we know about at the macro-economy into micro-modeling. We could also
so conceptualize the interactions of program traders. I can't look now, but
think they have a concept of "sterilization" to handle the effect.

So I guess, you could "seed" a model with one "true" trader, throw in gas in
the three forms of one.false(+\-) intertemporalist, one false(+) and one
false(-) and see what happens. I'm not saying I know how to formalize such
an experiment or what it will get us but I also know that the initial
funda\charts didn't either.

But anyway, in order to get interesting dynamics you might not need any
stochastic shocks, at all, just a mis-fortunate choice of strategy.

It also might be possible to engineer one of the existing models for a test,
a matter that might allow some insight on the discussion
Paul/Barkley/Paul/Barkley, etc. Here let both chartists and fundamentalists
each attempt to "false-false" cycle their respective paths. This sort of
thing would eventually extinguish the chartist revolutions in most cases
(unless they co-cycled for a real blow-out), as the "fundamentalists" are
also "mostly" true or "partly" honest. So, the fundamentalists (your type)
can generally obtain more leverage for their positions eventually. So most
bubbles burst on their own. If the fundamentalists per-chance have the wrong
macro-fundamentals they also can crash the system by trying to correct it. I
would rather have us read their fundamentals and establish the importance of
"internal" finance that is not just intra-corporate than call the public an
idiot.

Chiao,
Ronald Calitri

It just takes one accountant, don't get two in a room together

PS.
Paul in his comments suggests a bull-bear "true" switch in macro. But that
is a slide in the corn pile that will not dislodge the jumping beans.

Look for the Bull-Bear quick change artist out there. You will have the
beast.

RC

> Barkley Rosser
> -----Original Message-----
> From: Ronald Calitri <calitrir@xxxxxxxxxxxxx>
> To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> Date: Saturday, January 29, 2000 6:59 PM
> Subject: Re: General Thery seminar
>
>
> >Paul Henry Barkley Ted
> >    Henry's model is actually quite good. It is however, a crowded
terrain
> >compiled from many papers. The financial market emulates academic
finance;
> >and there wouldn't be a game if everybody wasn't able to win at least
> >somewhat consistently. By the way, Henry you are right that returns are
> >falsifiable; you neglect to note this is the standard practice in most
> >living corporations. The indices are compiled with error.
> >    So Barkley, let's try a different "game". Suppose there are two types
> of
> >traders in the market: True and False. The True traders adhere to their
own
> >fundamentals. That is, they cast their balance sheets and income
statements
> >after every trade. That is for ordinary investors, whose borrowing or
> >lending depends on present circumstances.
> >The False traders cast their balance sheets only when they are overbought
> or
> >over-sold. The distinction is designed to allow them to appear less
hedged
> >when appealing to borrowers and more hedged when going after investors.
> That
> >is for corporate investors with accounts on many sides that may be loaded
> >off.
> >    This model contains only "internal" features. Put in a "fundamentals"
> >dimension and the "False" traders seem to be farther from the
> >security-market frontier, and would presumably be in line to accrue
> >differentially any benefit from systematic forces attracting them towards
> >the norm.
> >    The question of interest then, concerns what will be the statistics
> >generated by the false and true mixture of positions. The question is not
> >whether the future is indeterminate, but rather whether the "true" data
> >about it may be distinguished from "falsified" data. Or more prosaically
> >whether heteroschedasticity in measurement error may be distinguished
from
> >variance in the underlying process.
> >    The speculation arises whether the undetectable trading off of
> >falsifications is involved in a bubble process, trapping true investors
on
> >an exponential copula.
> >
> >    By the way, it is not necessary the falsification be indetectible,
just
> >relatively intractable. There could be several layers relatively T/F and
> >turbulent stability. What I was thinking about was a simple example where
> >firms that acquire partial insight into the future like Henry's could
> >coexist with firms that distort their accounting data, without
engendering
> >systematic instability. The conclusion is that they could coexist so long
> as
> >they both drained resources from a third group with stricter constraints
on
> >positions. Rock-solid stability could be acquired if the "true" traders
> were
> >entitled to falsify returns against another group not allowed entree to
the
> >market at all.
> >
> > Chiao,
> >Ronald Calitri
> >
> >
> >
> >----- Original Message -----
> >From: Paul Davidson <pdavidson@xxxxxxx>
> >To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
> >Sent: Friday, January 28, 2000 5:14 PM
> >Subject: Re: General Thery seminar
> >
> >
> >> At 10:05 PM 01/27/2000 -0500, Henry wrote:
> >> >Believing that a computer program can be a good tool for consistently
> and
> >> >systematically generating stock anaylsis for stocks, our group have
> built
> >> >a model which we call  Artificial Intelligence Live Stock Commentary
> >> >Engine (AI LSCE).
> >> >We actually have a website:  www.tradetrek.com  (This is not a plug,
but
> >> >all are welcome to visit it, free).
> >> >
> >> >
> >> >                    Numerous studies have indicated that the stock
> >market,
> >> > as well as other financial markets, are predictable to a certain
> extent.
> >>
> >>
> >> Is that,  Henry, how you "knew"  the NYSE Dow Jones would go down by
more
> >> than 300 points today. Right?
> >>
> >>
> >> >                    The movements of stock prices (as well as the
prices
> >> > of other financial instruments) generally have a deterministic trend
> >> > superimposed by some "noise" signals, which, in turn, are composed of
a
> >> > truly random signal and a chaotic signal.
> >>
> >> Ex poste Henry -- everything has a deterministic trend.  All that means
> is
> >> that you are calculating a moving average of a series of numbers. By
> using
> >> the mathematical formula you to fit the data, you assure that there is
> >> always a moving average (i.e., a deterministic trend) and some vairance
> >> around the moving average.  That is the nature of how a moving average
is
> >> calculated, it has nothing to do with the real world-- if you believe
the
> >> future is encased in an nonergodic environment.
> >>
> >> As a test Henry, generate a column  of Random numbers -- or copy a
series
> >> off of a randon number Table-- and see that you can always find a
moving
> >> average (deterministic )trend and some random noise variance.  So what
> >does
> >> it mean?
> >>
> >> I wish economists would learn "design of experiments" processes before
> >> rushing off  for computer fishing expeditions.
> >> The computer has no intelligence-- I wish people who manipulate
computers
> >> would use their natural intelligence.
> >>
> >> PAUL
> >> Paul Davidson
> >> Holly Chair of Excellence in Political Economy
> >> Editor, JOURNAL OF POST KEYNESIAN ECONOMICS [JPKE]
> >> Economics Department -- 523 SMC
> >> University of Tennessee
> >> Knoxville, Tennessee 37996-0550
> >> email: Pdavidson@xxxxxxx;   phone: (865)974-4221;    fax: (865)
974-4601
> >> http://econ.bus.utk.edu/Davidson.html
> >>
> >>
> >
> >
>
>