Though our focus in global macro is on economic fundamentals and inter-market price relationships, we still value the importance of following price trends during periods of high uncertainty. In an uncertain world, it is rational to follow price momentum. If there are significant information asymmetries, prices will be driven by those who may have better private information.
An interesting paper on the use of trend–following is by Masahiro Watanabe, “Price volatility and Investor Behavior in an Overlapping Generation Model with Information Asymmetry” in the February 2008 Journal of Finance. When there is more information asymmetry, those traders which have poorer private information will rely on public price signals, price appreciation. When information becomes more accurate, trend-following will decline. When volatility is high, trends will appear as more follow the rational reaction of following price signals. This will further increase volatility.
For the less informed, it is useful to employ price signals or follow price momentum. Herding is a rational response by the less informed when there is high uncertainty. In fact, recent research suggests that trend-following may be expected when there is low quality information. Certainly, the last month has set a new standard of uncertainty about what is occurring in the credit markets and what will be the reaction of governments.
An interesting paper on the use of trend–following is by Masahiro Watanabe, “Price volatility and Investor Behavior in an Overlapping Generation Model with Information Asymmetry” in the February 2008 Journal of Finance. When there is more information asymmetry, those traders which have poorer private information will rely on public price signals, price appreciation. When information becomes more accurate, trend-following will decline. When volatility is high, trends will appear as more follow the rational reaction of following price signals. This will further increase volatility.
For the less informed, it is useful to employ price signals or follow price momentum. Herding is a rational response by the less informed when there is high uncertainty. In fact, recent research suggests that trend-following may be expected when there is low quality information. Certainly, the last month has set a new standard of uncertainty about what is occurring in the credit markets and what will be the reaction of governments.
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