Two weeks ago the Economist had both a leader and a briefing on momentum in financial markets, the apparent tendency for investments that performed better than the market for some time (say 6 months) to keep rising on average, and for losers to keep falling. Financial theory would predict that market participants will destroy this regularity quickly by trying to take advantage of it ("arbitrage it away"), unless trying to take advantage of this momentum effect is risky. Is it?
Well, the Economist managed to claim (in the same issue!) that "It cannot be explained away by saying that high-performing stocks are more risky" and that "[O]ne reason why the momentum effect has not been arbitraged away [may be]: it can go horribly wrong."
Wait a second, what is that? Would someone care to explain to me what the "risk" of an trading strategy is supposed to be, if not the fact that it can go "horribly wrong"? Risk is the danger of losing money, it is as simple as that. Standard deviations, beta s, "risk"factors and all those cute toys may or may not be useful ways of modelling risk, but they are not risk.
Don't fall in love with your theories, you might mistake them for reality.
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Es wird allgemein anerkannt, dass Investitionen die (für say half a year) "went" better than the market average continue to run well, and of bad investment worse, the so-called "momentum effect . Just as it is known, one would expect that investors would take advantage of this effect and destroy it automatically (see " arbitrage"). This would not only be possible if this investment strategy to buy (good running and Investments Private sell bad) would be particularly risky.
Now, the Economist, a magazine which I guess is usually quite, managed in the same issue in two articles on the subject (an editorial and a review article bahaupten to) the one that "explain the momentum effect can not risk", and also that the corresponding Anlagestategie "can go horribly wrong." Now I wonder what the editors really understand at risk if not for the fact that an investment can go terribly wrong?
is my suspicion that haunts much of finance theory in the head. All the Pretty standard deviations, beta s, "risk" factors etc. may be useful for risk model, but they are not risk.
Fall in 'Do not be in your own theories, Thou wouldst Wahrheiten halten.
P.S.: Strictly speaking, the quote from the Economist speaks about the risk of individual stocks (as opposed to the risk of the trading strategy) not explaining the momentum effect. But that's trivial, so I assume they really mean the risk of a momentum portfolio.
P.P.S.: Der Titel ist natürlich eine Anspielung auf das bekannt Warren-Buffett-Zitat " Risk comes from not knowing what you're doing. ".
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