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solaris writes;
first off, MPT relies on linear mathematics and normal or Gaussian statistics. i don't care what aspect of the market you look at, market behavior does not fit simple Gaussian assumptions. MPT assumes that prices change in a random walk - that is also not true as the market is complex adaptive. [snip]

I couldn't agree more - it would be interesting to look at somesort of non-linear correlation coefficient where you could break down the correlation between markets - for example based on the size of price changes, where you'd probably find much higher correlations for large & sudden price movements (say >2%) than for small ones.

I think that for the markets to get better analysis someone needs to teach the economists some more math (or maybe the reduced number of math PhD's not going to the NSA now will help somewhat). I think that until you have experience with working on (or modelling) complex/non-linear systems it can be hard to grasp how counter-intutive they can be.

On the Berkshire board a couple of us were trying to explain a while ago to a poster why we thought that a couple of big catastrophies (which might cost the company $200-500m) would be the best thing that could happen to the company - simply because the insurance/reinsurance markets would adapt to the events, eliminating capital, rasing prices, etc. Not very linear, but perhaps not a bad model for the industry. The counter arguement was gut instinct :( Hopefully not by engineers :)

peter xyz
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