The real story here is this wonderful exposition in applying diffusion models to a time series data that is neither discrete nor continuous. It’s always fascinating to see diffusion models applied in different scenarios, same with diffusion language models.
There is no model of the market that can remain stably accurate because the market will inevitably incorporate the insights of any model that is accurate until those insights are no longer accurate
in order for your model to accomplish that, you would get very rich.
there will also likely always be more. in the limit in order to get an edge your model would start to infer insider information. for example, it's common knowledge by now that satellite imagery is used to measure car numbers in parking lots, that's a proxy for insider information.
so it's not even so much the model as it is the data.
even being able to forecast weather better than publicly available methods can be leveraged to gain a significant edge.
The market has modes and reverts behavior when it switches them. Thus happy bouncy becomes hammered stammered. The prediction models fall hook and sinker for that.
Might not work for long holds but for short daytrading I feel like getting enough data for a model, not llm but any model, is the real golden goose moat of most ibs. Pajama traders at home have to set up heuristics for what they believe is a bull flag and maybe develop even a refined gut sense of spotting say a bull flag.
But imagine a quant at Jane street. They see the same candlestick pattern as the pajama guy but their model is giving them actual odds ratios instead of gut instinct. They can now score their putative bull flags in real time and make investments that might be more likely to pay off than not.
A big reason why this works is that technical analysis is a self fulfilling prophecy. Many people are looking for and trading on the exact same signals and this is enough to see a pattern in the candlestick data actually be one associated with market movement. Whether the market movement is 'genuine' or manufactured by other quantitative technical traders in this self fulfilling prophecy doesn't matter, you've made your money and really don't care about the underlying asset at the end of the day, only its delta.
You hear that often, but if you squint your eyes, the entire idea of index funds is just that: they outperformed stock-pickers in the past, so you should put money into them to get higher returns in the future. There's no fundamental index fund investment thesis other than "past performance is indicative of future returns".
That thesis is at least to some extent self-fulfilling, because there's so much money flowing into index funds that prices of all the underlying assets keep moving up, and there's probably not enough money trying to bid against that / arbitrage the excesses away.
A similar thing could happen with AI. Markets are efficient only if the world isn't in some sort of a trance.
That's not the idea behind index funds. It's arithmetic. The aggregate return of active investors, before fees, is the market return. Once you subtract fees, it's below the market return. While some active managers' performance less fees is higher than the market return, it's very difficult to predict which will perform this way. So your best bet is to own the market through a broad index fund that has almost no cost.
If you want to read about this, see Sharpe (1991), The Arithmetic of Active Management.
In a spherical cow sense sure. But no one is buying the market return when they buy even a total market index fund. Other commenter is right, they are expecting past performance of these index funds to be indicative of future returns. But then again they aren't really actively investing either. Automatic contributions pervert a lot of the efficient market hypothesis ideas I think since these people are buying, routinely, maybe as long as they are alive, with no information in front of them.
I don't think that's a particularly accurate assessment of the idea behind index funds.
The point of index funds isn't "these outperform all pickers, so they'll outperform all pickers in the future."
I think the idea is more around a combination of:
- you'll have much lower risk trying not to pick the right picker (or pick the investments yourself)
- the median picker is probably not very good (approached in two directions: sizable pickers that hit on an edge will likely be copied until the edge is gone, and smaller pickers are extremely unlikely to have enough specialized info or skills to excel).
> you should put money into them to get higher returns in the future.
Higher returns than what? I thought the whole point of buying broad market index funds was to simply get the market returns. For this thesis to make sense, you simply must assume that companies, in aggregate, make money - not that any particular company will follow past performance. If you don't think companies make money, then what are you doing buying equities?
there will also likely always be more. in the limit in order to get an edge your model would start to infer insider information. for example, it's common knowledge by now that satellite imagery is used to measure car numbers in parking lots, that's a proxy for insider information.
so it's not even so much the model as it is the data.
even being able to forecast weather better than publicly available methods can be leveraged to gain a significant edge.
There's definitely alpha out there, but I wouldn't want to make it my job to look for it
But imagine a quant at Jane street. They see the same candlestick pattern as the pajama guy but their model is giving them actual odds ratios instead of gut instinct. They can now score their putative bull flags in real time and make investments that might be more likely to pay off than not.
A big reason why this works is that technical analysis is a self fulfilling prophecy. Many people are looking for and trading on the exact same signals and this is enough to see a pattern in the candlestick data actually be one associated with market movement. Whether the market movement is 'genuine' or manufactured by other quantitative technical traders in this self fulfilling prophecy doesn't matter, you've made your money and really don't care about the underlying asset at the end of the day, only its delta.
That thesis is at least to some extent self-fulfilling, because there's so much money flowing into index funds that prices of all the underlying assets keep moving up, and there's probably not enough money trying to bid against that / arbitrage the excesses away.
A similar thing could happen with AI. Markets are efficient only if the world isn't in some sort of a trance.
If you want to read about this, see Sharpe (1991), The Arithmetic of Active Management.
The point of index funds isn't "these outperform all pickers, so they'll outperform all pickers in the future."
I think the idea is more around a combination of:
- you'll have much lower risk trying not to pick the right picker (or pick the investments yourself)
- the median picker is probably not very good (approached in two directions: sizable pickers that hit on an edge will likely be copied until the edge is gone, and smaller pickers are extremely unlikely to have enough specialized info or skills to excel).
Higher returns than what? I thought the whole point of buying broad market index funds was to simply get the market returns. For this thesis to make sense, you simply must assume that companies, in aggregate, make money - not that any particular company will follow past performance. If you don't think companies make money, then what are you doing buying equities?