Friday, 9 May 2014

The Fractal Market Hypothesis

Excerpts from: "The Fractal Market Hypothesis and its implications for the stability of financial markets" by Nicola Anderson, Joseph Noss, 3 September 2013, © voxEU.org.

1. Financial prices display ‘fractal’ properties. This column conjectures that this is caused by interactions among agents with different horizons and interpretations of information. This structure appears to be associated with a special sort of stability that can be disrupted – leading to price crashes – if these interaction breaks down.

2. Financial prices appear to exhibit ‘fractal’ properties over time. A defining property of fractals is the tendency of an object to be similar to parts of itself.

3. Self-similarity produces objects that appear simple and smooth from a distance. But, under magnification, their pattern seems increasingly complex in ways that are repeated at increasingly fine degrees of resolution. This property is present in financial market prices.

4. Self-similar fractal structures seem to be favoured by nature as a way of ensuring the stability of systems in the natural world.

5. Financial markets can become prone to instability when their fractal structure is broken. Such a breakage could occur when investors with a longer horizon either stop participating in the market, or become short-term investors.

6. The removal of longer-term investors from the market, or reduction in their trading horizon, causes liquidity to evaporate as there is no longer heterogeneity of investor valuations.

7. Circuit breakers are simple rules under which all trading of a given product on a given exchange is halted if prices move too erratically, as judged by some pre-set criteria. Under the fractals view, such a break in trading would allow for the resolution of any informational asymmetries between investors who view the market at different frequencies, allowing longer-term investors to regain their confidence in market information.

FULL PAPER: Bankofengland.co.uk

FURTHER READING, Offtopic: 1. Recursive Fractals
2. A healthy heart is a fractal heart

SOME FRACTALS:



1. Second Thoughts...

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