Evidence for time-dependent structures in financial data series over long timescales: Opportunities for dynamic market r
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Julian Coutts obtained a first class honours degree (1983) and a D Phil (1986) in Physics at Oxford University, and an MBA from Warwick University (1995). After postdoctoral research at the Joint Institute for Laboratory Astrophysics in Boulder, Colorado, USA, as the Lindemann Fellow, he worked for BP Research eventually leading a team of applied mathematicians, statisticians, and physicists, He was a quantitative analyst and fund manager at Morgan Grenfell Asset Management, and since 1997 has been at Standard Life Investments in a variety of roles. He has built a Risk Management desk, and created a $1bn index fund operation. He is currently the Head of Multi-Asset Risk, in the Multi-Asset Strategies team. Strategic Solutions Unit, Standard Life Investments, 1 George Street, Edinburgh EH2 2LL, UK. Tel: þ 44 0131 245 4254; Fax: þ 44 131 225 2345; E-mail: [email protected]
Abstract Market participants have a natural timescale, and they only seek to profit from money-making ideas that have a chance of maturing on a similar timescale to that over which they are measured. Due to the increasingly short-term nature of fund management mandates, opportunities have arisen for those participants willing to take stances over the longer term. In this paper, we outline the rigorous tests that demonstrate the existence of money-making opportunities at long (multi-month to multi-year) timescales, as well as the conceptual arguments, and examples of real opportunities taken. Using the concept of surrogate data sets, we can convincingly reject the concept of independently identically distributed returns on a multi-month to multi-year timescale for stocks and indices, including the Barclays Capital Equity Gilt Study data for the 20th century. Journal of Asset Management (2007) 8, 152–160. doi:10.1057/palgrave.jam.2250073 Keywords: variance ratio tests, dynamic asset allocation, mean reversion
Background: The concept of timescale for opportunities Advanced investment houses develop a philosophy for approaching the market with a view to obtaining money-making ideas. These houses develop a common language to ensure that every idea is subject to the same level of rigorous scrutiny. Then positions are taken and portfolios implemented, to the risk appetite of the chosen investor.
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The shrewd observer will, however, see that certain players in the markets cluster together, in that they develop approaches with similarities to others in the cluster, and differences from other clusters. For example, hedge funds talk about strategies that have no direct relationship with the language of fund management houses. Fund managers have difficulty in relating their language to demographics and to the evolution of
Journal of Asset Management Vol. 8, 3, 152–160 & 2007 Palgrave Macmillan Ltd, 1470-8272 $30.00 www.palgrave-journals.com/jam
Time-dependent structures in financial data series over long timescales
actuarial variables like mortality. What is the concept that binds all these together within a larger framework? We propose
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