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Fractal Markets Hypothesis and the Global Financial Crisis: Wavelet Power Evidence

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  • Ladislav Kristoufek

Abstract

We analyze whether the prediction of the fractal markets hypothesis about a dominance of specific investment horizons during turbulent times holds. To do so, we utilize the continuous wavelet transform analysis and obtained wavelet power spectra which give the crucial information about the variance distribution across scales and its evolution in time. We show that the most turbulent times of the Global Financial Crisis can be very well characterized by the dominance of short investment horizons which is in hand with the assertions of the fractal markets hypothesis.

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File URL: http://arxiv.org/pdf/1310.1446
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Paper provided by arXiv.org in its series Papers with number 1310.1446.

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Date of creation: Oct 2013
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Publication status: Published in Scientific Reports 3:2857, 2013
Handle: RePEc:arx:papers:1310.1446

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  1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
  2. Alexandre Roch, 2011. "Liquidity risk, price impacts and the replication problem," Finance and Stochastics, Springer, Springer, vol. 15(3), pages 399-419, September.
  3. Szabolcs Mike & J. Doyne Farmer, 2007. "An empirical behavioral model of liquidity and volatility," Papers 0709.0159, arXiv.org.
  4. António Rua & Luís Catela Nunes, 2009. "International comovement of stock market returns: a wavelet analysis," Working Papers, Banco de Portugal, Economics and Research Department w200904, Banco de Portugal, Economics and Research Department.
  5. Lukas Vacha & Karel Janda & Ladislav Kristoufek & David Zilberman, 2012. "Time-Frequency Dynamics of Biofuels-Fuels-Food System," Papers 1209.0900, arXiv.org.
  6. Lukas Vacha & Jozef Barunik, 2012. "Co-movement of energy commodities revisited: Evidence from wavelet coherence analysis," Papers 1201.4776, arXiv.org.
  7. Philipp Weber & Bernd Rosenow, 2006. "Large stock price changes: volume or liquidity?," Quantitative Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 6(1), pages 7-14.
  8. Ladislav Kristoufek, 2012. "Fractal Markets Hypothesis And The Global Financial Crisis: Scaling, Investment Horizons And Liquidity," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., World Scientific Publishing Co. Pte. Ltd., vol. 15(06), pages 1250065-1-1.
  9. Jain, Prem C. & Joh, Gun-Ho, 1988. "The Dependence between Hourly Prices and Trading Volume," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 23(03), pages 269-283, September.
  10. Luís Francisco Aguiar-Conraria & Maria Joana Soares & Nuno Azevedo, 2007. "Using Wavelets to decompose time-frequency economic relations," NIPE Working Papers, NIPE - Universidade do Minho 17/2007, NIPE - Universidade do Minho.
  11. J. Doyne Farmer & Laszlo Gillemot & Fabrizio Lillo & Szabolcs Mike & Anindya Sen, 2003. "What really causes large price changes?," Papers cond-mat/0312703, arXiv.org, revised Apr 2004.
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Cited by:
  1. Rita Sousa & Luís Aguiar-Conraria & Maria Joana Soares, 2014. "Carbon Financial Markets: a time-frequency analysis of CO2 price drivers," NIPE Working Papers, NIPE - Universidade do Minho 03/2014, NIPE - Universidade do Minho.

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