High-Frequency Trading Inspires a Formula
|Jan 11th, 2012 | Filed under: Algorithmic and high-frequency trading, Alpha Strategies, Today's Post | By: cfaille||
In a new working paper, Godfrey Cadogan, of Toronto’s Ryerson University, offers a stock-price formula designed to capture the “empirical regularities of high frequency trading.”
As is often the case, though, the discussion can leave those of us outside the quant world confused: does the rendering of facts as a formula make them clearer, or does it just create a potentially misleading patina of precision?
Given Cadogan’s ambitious-sounding program, linking HFT, bubbles, and crashes all into one formula, one remarkable feature of the result is his formula’s extreme simplicity or, as Cadogan puts it, its “parsimony.” I was reminded of the warnings in Emanuel Derman’s recent book, Models.Behaving.Badly, that the “simple models” of finance economists have failed “to reflect the complex reality of the world around them,”
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Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."