It’s ridiculous. I have the CFAI book in front of me (V2 pg. 83-84), and I can’t see how with this in front of me I wold have any more clarity on the answer. Here’s the thing- their use of the word “fast” and “slow” doesn’t to me seem like they’re talking about how turnover or frequently traded it is, but has more to do with length of time, i.e. “short-term” or “long-term” inefficiencies- when they say ‘longer term inefficiencies’, I still read it as something that can be accomplished by trading a thousand times in an hour, just over a longer period of time. The conclusions reached are: 1. “hurling fast ideas” at acute inefficiencies is basically futile. 2. Then there’s a long list of chronic inefficiencies will persist but they may be hard to discern. Nothing I see about ‘frequency of trading’, just that the acute opportunity windows will last shorter than the chronic ones.
^^I agree. I think that is the trick. If we could all hurl fast ideas and make money the masses would allocate their assets and spend their days in riskless arbitrage. Since those opportunities are fleeting, the majority of assets and investors are instead actively seeking alpha as they hunt the long list of persistent chronic inefficiencies. More trading opportunities in chronic.
Just my two .02 I put Acute. My Reasoning seems to match up with those who put Acute. The bototm line I was thinking is that Acute is short term, meaning you spot the arbitrage, trade it and then close the trade and move on to the next one. Chronic are LT bets that you see something in lets say a mistaken growth rate of an industry. You take the bet once and hold for a LT gain waiting out the market to declare you correct. However the acute are easily spotable and quickly trade away, meaning you find the “loophole” and trade it frequently. I agree that this question leads for a lot of discussion. And though I was confident in my initial answer, I am now open to both answers.
I chose acute.
akibe Wrote: ------------------------------------------------------- > can the initiator of this thread contact the CFAI > to explain the debate? Maybe the question was > poorly written and they may cancel that question > (see another thread on this type of procedure). We > have apparently until the 12th to mention anything > related to the exam… > > So what’s the conclusion? Acute or Chronic? I don’t think they need to be notified. I think this debate is intended. You read a question, and in a lot of cases your mind has some bias that steers you in a certain direction. and of course there is a distractor in there to entice you. All the while the text spent a paragraph outlining what answer they want. And when you are done you say, “damn I am awesome, that was ridiculously easy”, swallowing the bait whole.
I am in the acute camp. While I was reading the question the thing that stuck in my mind was that the investor BELIEVED that the market was prone to acute inefficiencies. Thus he or she would think they saw an opportunity and know it would only be open for a short time, thus trade quickly. Believing this was a frequent occurance would lead to frequent trading. Also knowing that chronic inefficiences are difficult to exploit, they would have more time to complete those trades and thus not be in as much of a rush. But a good debate all around on a very tricky question. For better or for worse, I focused on the investor’s perception of the market and how it would affect their trading vs. what type of inefficiencies would lead to more trading as a whole.
slouiscar Wrote: ------------------------------------------------------- > ^^I agree. > > I think that is the trick. If we could all hurl > fast ideas and make money the masses would > allocate their assets and spend their days in > riskless arbitrage. Since those opportunities are > fleeting, the majority of assets and investors are > instead actively seeking alpha as they hunt the > long list of persistent chronic inefficiencies. > More trading opportunities in chronic. I agree w/ that too- but the ? did not ask what strategy had more AGGREGATE trading, rather what strategy involved high frequency trading. I might have to give it to you considering your CFAI citations- but I still fully disagree. Yeah- a lot more AUM is mngd under the chrionic as you say, but the higher turnover strategy is def. acute.
I can’t discuss the specifics of the question, so I could be way off in all of that above. I am just relaying what I read in the text. If I was an individual or average institutional client and you asked me do I believe in acute inefficiencies, I would say yes. If you asked me do I trade them ever, I would say no, I am not that smart or fast or I can’t use leverage to earn an acceptable arb profit. So my potential turnover in response to acute ineff is 0. If you asked me do I believe in chronic inefficiencies, again I would say yes. If you asked me do I trade them, I would say sure, frequently I purchase stocks and/or bonds based on some analysis that the market is inefficient due to herding/anchoring/frame dependence, etc. So my potential turnover in response to chronic is much higher.
Behavioral Factors that Lead to Chronic Inefficiencies: Convoy behavior. Do what the herd does - no necessarily high turnover. Process vs. Outcome - N/A Price target revisionism: stay in a stock longer because keep moving target price up - less turnover Rigidity - would not turnover something you are sure about Ebullience Cycle- market goes down, I stop trading
^^Good post. So since I believe in all those chronic inefficiencies, I want to take advantage of each and every one of them. To do that, I do this: Convoy behavior- the herd goes here or avoids there. - I place trades. Process vs. Outcome - you let performance influence decisions - I place trades. Price target revisionism: you hold too long and move your target up. I place trades. Rigidity - unsure if that is bad news? I place trades. Ebullience Cycle- You don’t look at your statement? I place trades. In each case, I trade in an active attempt to benefit from the chronic inefficiency the behavioral trait creates.
Chronic: Hard to identify => less frequent trading Chronic: Hard to exploit => less frequent trading Chronic: Long to time to correct => less frequent trading Acute: Easy to identify => more frequent trading Acute: Easy to exploit => more frequent trading Acute: Short time to correct => more frequent trading
neither argument is supported in the text. the text never says frequency of anything, it just keeps concluding that chronic inefficiencies are the ones that can be consistently exploited, and acute inefficiencies are ephemeral and hard to take advantage of. The distinction it draws between chronic and acure are purely about how persistent they are, and i still think any speculation about high turnover is conjecture. There is nothing that says something with a ‘shorter’ window necessarily requires more frequent trading than one that is open longer, though intuitively that might seem to be the case. Of course, this debate is quickly descending into abstraction because there are like only three paragraphs in the whole dang curriculum that discusses it, and we’re re-interpreting it a thousand ways. I put chronic, but I went back and forth so many times… i guess i wouldn’t be surprised if it WERE acute, but i still feel like the CFAI stuff was trying to get us to think that chronic inefficiencies are what are exploitable.
sparklala731 Wrote: ------------------------------------------------------- > neither argument is supported in the text. > > the text never says frequency of anything, it just > keeps concluding that chronic inefficiencies are > the ones that can be consistently exploited, and > acute inefficiencies are ephemeral and hard to > take advantage of. > > The distinction it draws between chronic and acure > are purely about how persistent they are, and i > still think any speculation about high turnover is > conjecture. > > There is nothing that says something with a > ‘shorter’ window necessarily requires more > frequent trading than one that is open longer, > though intuitively that might seem to be the case. > > > Of course, this debate is quickly descending into > abstraction because there are like only three > paragraphs in the whole dang curriculum that > discusses it, and we’re re-interpreting it a > thousand ways. I put chronic, but I went back and > forth so many times… i guess i wouldn’t be > surprised if it WERE acute, but i still feel like > the CFAI stuff was trying to get us to think that > chronic inefficiencies are what are exploitable. Regarding Chronic, from the CFAI text, " the market can remain irrational far longer than you can hang onto your position" If you’re hanging on to your position, by definition high turnover is not occurring. I also think if something is “less discernible, more ambiguous”, you can again conclude frequent trading is not happening.
I put acute - lets not loose sight of the question please. It was which method results in the most frequent trading? was that correct? if so I appreciate the chronic side info but it doesnt address the frequency issue in my mind. its a no brainer in my mind but we wont agree it seems. Frequent trading and long term chronic inefficiencies are opposite ideas in my mind. but i just wanted to make sure that the word “frequently” was the key word?
I think we have this covered. I think it was an excellent question that effectively captured the concepts outlined in the text. Now I have to get back to work identifying and implementing trades designed to generate alpha by taking advantage of perceived chronic inefficiencies. And of course I imagine you have a few hundred leveraged arbitrage positions out there this afternoon to tend to.
slouiscar Wrote: ------------------------------------------------------- > I think we have this covered. I think it was an > excellent question that effectively captured the > concepts outlined in the text. > > Now I have to get back to work identifying and > implementing trades designed to generate alpha by > taking advantage of perceived chronic > inefficiencies. > > And of course I imagine you have a few hundred > leveraged arbitrage positions out there this > afternoon to tend to. I’m sure you will be engaged in very frequent trading, as you wait months/years for that chronic inefficiency to correct itself (if it ever does, hence ‘chronic’). Happy hunting.
The answer is acute. Acute inefficiencies are coming and going very quickly. If you believe you can take advantage of them then you are making many trades (more likely your computer program is making many trades) Chronic inefficiencies are things like the tech bubble. You know it’s going to burst but you don’t know when. People keep herding into the bubble blowing it up further. You put in a short position. You might have to wait for months or years before you finally make money and reverse your position. Fewer trades are made.
the tech bubble burst pretty quickly
I have been convinced. In another thread I requested an example of an acute inefficiency that could be traded that day. A poster I tend to trust laid out an example that included a long XYZ in toronto, fx rate of x, and short XYZ on the NYSE. The riskless profit was two to three pennies outside the bid-ask spread, though it assumed no transaction costs. He posted exactly two minutes later to inform me that the fx quote had moved, noting that X00 other traders trading this mispricing likely closed the window, eliminating the arb opportunity, (an arb opportunity that assumed simultaneous and instantaneous execution of multiple trades on three different exchanges, all with zero transaction costs.) As noted, I have been convinced that if you believe in acute inefficiencies you are more active. The speed at which you would have to act in and out to trade acute inefficiencies implies that is logical. That said, some little piece of me begs, go against the grain, note its absence from text. That piece wonders how easy it would be for this beast to ask a question as one final jab, a nice little, “Oh, so all you geniuses think you are ready to outsmart the world? You think you can just sit at your desk all day placing trades earning riskless profits,? Yup, that’s it. 300 trades a day of riskless profits compounding. Sounds awesome, good luck with that.” Anyway I concede, it is acute. I will end this for me the way I began it, with the closing paragraph from the text, Alpha Hunters and Beta Grazers, Martin L. Leibowitz . "One can elect the passive approach–fly the beta flag and allow one’s portfolio to float on the “index currents.” Or one can choose to be an active alpha-seeking investor and try to chip away at the many chronic inefficiencies and behavioral biases that we know exist, even though we can’t clearly discern how they are priced and whether they will profitably regress toward equilibrium within a reasonable time. With chronic inefficiencies, by their very definition, discernibility will always be somewhat clouded. (Otherwise, they would become acute–and would be long gone.) So with these opportunities, one is always acting on imperfect knowledge and playing the odds. But without actively scanning the horizon and being poised to move on reasonably discernable opportunities, investors will surely have no chance of reaping the incremental return inherent in the grand continuous march toward efficiency. "
say it ain’t so slouis. but yeah, i’ve been marking myself wrong for having changed it to chronic…