Tuesday, June 06, 2006

Holy grail postponed

As I write this, financial markets are in a deep funck because "stagflationary" (the worst kind) of expectations are in the air.

How convenient, then that The Economist writes about James Tetlock's upcoming "Giving Content to Investor Sentment", forthcoming in the Journal of Finance. See Economic Focus: In a sentimental mood ... What bulls and bears can learn from the hacks. (Link includes link to PDF version of the paper.)

Will this cause us to re-think random walks? Tetlock reports the extent to which we measure market sentiment by word-counts (and the use of taxonomies) with columns like the daily "Abreast of the Market" in the WSJ.

But "[t]he power of the financial press, whatever, its source is fleeting. The pall that a column can cast over the stockmarket soon lifts ... the damage is reversed within five days. Prices rebound, and cool-headed arbitrageurs earn their just reward for taking shares off skittish investors' hands."

Getting ahead of the random walk is investors' holy grail. My reading of Tetlock's paper is that he has not actually found the holy grail. Stay tuned. Buy and hold.