Fractal Markets Hypothesis and the Global Financial Crisis: Scaling, Investment Horizons and Liquidity

Abstract

We investigate whether fractal markets hypothesis and its focus on liquidity and invest- ment horizons give reasonable predictions about dynamics of the financial markets during the turbulences such as the Global Financial Crisis of late 2000s. Compared to the mainstream efficient markets hypothesis, fractal markets hypothesis considers financial markets as com- plex systems consisting of many heterogenous agents, which are distinguishable mainly with respect to their investment horizon. In the paper, several novel measures of trading activity at different investment horizons are introduced through scaling of variance of the underlying processes. On the three most liquid US indices - DJI, NASDAQ and S&P500 - we show that predictions of fractal markets hypothesis actually fit the observed behavior quite well.

arXiv comment11 pages, 3 figures

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• Time-dependent scaling patterns in high frequency financial data
• Price and Quantity Trajectories: Second-order Dynamics
• Multiagent's model of stock market with p-adic description of prices
• A Topological Approach to Scaling in Financial Data