Wednesday, September 2, 2009

More physicists getting on the financial engineering ride

Physicists successfully predict stock exchange plunge

Their model, which employs concepts from the physics of complex atomic systems, was developed by Didier Sornette of the Financial Crisis Observatory in Zurich, Switzerland, and Wei-Xing Zhou of the East China University of Science and Technology in Shanghai. The idea is that if a plot of the logarithm of the market's value over time deviates upwards from a straight line, it's a clear warning that people are investing simply because the market is rising rather than paying heed to the intrinsic worth of companies. By projecting the trend, the team can predict when growth will become unsustainable and the market will crash.

A "logarithm of the market's value..."? What the hell does that mean?

It's old news. The books My Life as A Quant and The Predictors (1999) had already given us a glimpse of how advanced mathematics, paired with the right brain, could result in very profitable market inefficiency exploitations. In fact I do research in the same field, hmm...

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