Mike
Epstein Award 2014
Market
Technicians Association Educational Foundation
Prof.
Blake LeBaron: Abram L. and Thelma Sachar Professor of International Economics
at Brandeis University
In
2009, the MTA Educational Foundation established an annual award in memory of
our late colleague, Mike Epstein. Each
year, the award is presented to the person who best exemplifies Mike’s goals
for long-term sponsorship of technical analysis in academia and in practice.
The
original mission of the MTA Educational Foundation was to create and fund
educational programs in the field of technical analysis. Throughout the years,
this mission has expanded to include the creation and support of a complete Technical
Analysis curriculum that is now being taught in colleges and universities for
college credit. (source: MTAEF.org)
Fulfilling
these goals would not be possible without dedicated partners from academia. Advocates
on the university side are critical for not only teaching what we already know
about technical analysis but forging new ground in the field that we can pass
on to the next generation to put into practice.
The MTA Educational
Foundation is honored that Professor Blake LeBaron of Brandeis University will
accept the 2014 Mike Epstein award. His work goes beyond the indicators that most
of us use to the core of how markets operate and how strategies for dealing
with them evolve over time.
For most of us, the
world of non-linear analysis and simulated markets is beyond our day to day
activities of trying to make money for ourselves or for our clients. Indeed,
most of the time "regular" analysis does quite nicely. It is the
outliers, the unusual and the black swans, that have the potential to drastically
change our results and Prof. LeBaron's work seeks to understand them.
For those people
who have only heard of technical analysis, it is a somewhat mysterious endeavor.
After all, forecasts are made without considering how a company's business is
doing or how international trade is flowing. What they don’t realize is that
the sum wisdom of the crowd - that thing we call the market - is indeed
considering those factors and just about everything else professionals and
amateurs worldwide track. But instead of
making rational guesses directly from the data about what might happen to
future stock, bond and other prices they take the indirect route of measuring
what everyone has done and is doing about it right now.
In other words, it
tracks where people are putting their money rather than their talk. I'll spare
you the colloquialisms about what talks and what walks.
Technical analysis
is a pure play on market forecasting and money management. Its input - price -
is what actually happened and it is never revised later as a government report
usually is. And it is objective. Price is what it is. It is not subject to
individual interpretation.
Of course, this is
the simplest way to look at it. There are many derivatives of price, such as
momentum indicators, commonly in use today. Other market generated data such as
volume and sentiment indicators round out the second level of analytical
inputs.
The next level is
where Professor LeBaron and his colleagues do their work. His research has
concentrated on the issue of nonlinear behavior of financial and other macroeconomic
data but he is also interested in understanding some of the observed behavioral
characteristics of traders. This includes strategies such as technical analysis
and portfolio optimization.
It sounds like an
earful for most of us, especially considering his many publications with titles
such as "Heterogeneous Gain Learning and Long Swings in Asset Prices"
and "Chaos and Nonlinear Forecastability in Economics and Finance."
We've heard the
phrase "publish or perish" in the university world and with tongue
planted firmly in cheek these impressive titles are well above my pay grade.
But then consider a few of LeBaron's other publications: "Wealth Dynamics
and a Bias Toward Momentum Trading" and "Foreign Exchange Market Trading
Volume and Federal Reserve Intervention." Those are of direct interest to
most of us.
For the less
informed, this writer included, the jargon masks the value in the research.
Blake LeBaron was
born in Boston so Brandeis is a coming home of sorts for him. But before that,
he was a computer science and engineering major at Rensselaer Polytechnic
Institute. He developed his interest in economics there and given his chosen
fields of study he knew it was going to be from a data driven, computational
approach.
His graduate work
at the University of Chicago, where he earned his PhD, was focused on
non-linear aspects of finance and his thesis was on nonlinear dynamic chaos,
tested on stock returns. What was most interesting to him was finding the
deeper meaning in the many the wiggles we see every day in the stock market.
What he found was that they are not really as random as they seem. And chaos is
not just the absence of identifiable trends but something that hides that
meaning.
This led to direct
testing of technical analysis in the 1990s.
Today, he is
juggling several investigations. One is on minimum variance portfolios and how
they are related to trend following. Another compares and contrasts the carry
trade with trend following in the foreign exchange markets. And a third is
trying to understand how trend following strategies come together to become
correlated, and therefore a common factor.
Quoting, "This is the 'when alpha becomes beta' dynamic that many
people talk about."
I'll give you a
moment to let all that sink in.
LeBaron sees
changes in the investment world, especially since the financial crisis of 2008.
Persistently low interest rates, high frequency trading and exchange-traded
funds are making their mark. More significantly, they have changed the overall
body of market data over time. That is important to note when attempting to
explain market movements because the data a decade ago was simpler and trader
intentions were more easily determined. Today, one can express a bullish or
bearish opinion with complex strategies including multiple instruments.
He also suspects
that investors and traders themselves are changing. Whether it is the rise of
passive or semi-passive investing through ETFs or lingering shock over two bear
markets in just a few years, something is different. But as all of us in the
technical analysis world believe, so, too, does LeBaron believe that that
technical analysis can still smoke out market changes early.
He says that
students at Brandeis have a great interest in the field. While he is not
teaching a direct technical analysis course this semester, he reports that
there are enthusiastic students with dual interest in behavioral finance. The
students have even formed the Brandeis Technical Trader’s Society to educate
members on the subject and on related topics.
From his office
located in the middle of the woods off to the side of the Brandeis campus,
Blake LeBaron is indeed fostering interest by students in technical analysis.
He is also proving that technical analysis is a viable strategy for not only
understanding how markets evolve but in putting strategies to work in the real
world today.
