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Equity prices as a simple harmonic oscillator with noise

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  • Ataullah, Ali
  • Tippett, Mark

Abstract

The centred return on the London Stock Exchange's FTSE All Share Index is modelled as a simple harmonic oscillator with noise over the period from 1 January, 1994 until 30 June 2006. Our empirical results are compatible with the hypothesis that there is a period in the FTSE All Share Index of between two and two and one half years. This means the centred return will on average continue to increase for about a year after reaching the minimum in its oscillatory cycle; alternatively, it will continue on average to decline for about a year after reaching a maximum. Our analysis also shows that there is potential to exploit the harmonic nature of the returns process to earn abnormal profits. Extending our analysis to the low energy states of a quantum harmonic oscillator is also suggested.

Suggested Citation

  • Ataullah, Ali & Tippett, Mark, 2007. "Equity prices as a simple harmonic oscillator with noise," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 382(2), pages 557-564.
    • Handle: RePEc:eee:phsmap:v:382:y:2007:i:2:p:557-564
    DOI: 10.1016/j.physa.2007.04.010
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    References listed on IDEAS

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    1. Roehner,Bertrand M., 2002. "Patterns of Speculation," Cambridge Books, Cambridge University Press, number 9780521802635.
    2. Shleifer, Andrei, 2000. "Inefficient Markets: An Introduction to Behavioral Finance," OUP Catalogue, Oxford University Press, number 9780198292272, Decembrie.
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