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Price Clustering and Discreteness: Is there Chaos behind the Noise?

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  • Antonios Antoniou
  • Constantinos E. Vorlow

Abstract

We investigate the "compass rose" (Crack, T.F. and Ledoit, O. (1996), Journal of Finance, 51(2), pg. 751-762) patterns revealed in phase portraits (delay plots) of stock returns. The structures observed in these diagrams have been attributed mainly to price clustering and discreteness. Using wavelet based denoising, we examine the noise-free versions of a set of FTSE100 stock returns time series. We reveal evidence of non-periodic cyclical dynamics. As a second stage we apply Surrogate Data Analysis on the original and denoised stock returns. Our results suggest that there is a strong nonlinear and possibly deterministic signature in the data generating processes of the stock returns sequences.

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Paper provided by arXiv.org in its series Papers with number cond-mat/0407471.

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Date of creation: Jul 2004
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Handle: RePEc:arx:papers:cond-mat/0407471

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  1. Kramer, Walter & Runde, Ralf, 1997. "Chaos and the compass rose," Economics Letters, Elsevier, Elsevier, vol. 54(2), pages 113-118, February.
  2. James Theiler & Stephen Eubank, 1993. "Don't Bleach Chaotic Data," Working Papers, Santa Fe Institute 93-05-026, Santa Fe Institute.
  3. Cho, David Chinhyung & Frees, Edward W, 1988. " Estimating the Volatility of Discrete Stock Prices," Journal of Finance, American Finance Association, American Finance Association, vol. 43(2), pages 451-66, June.
  4. Antoniou, Antonios & Vorlow, Constantinos E., 2004. "Recurrence quantification analysis of wavelet pre-filtered index returns," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 344(1), pages 257-262.
  5. Brock, William A & Baek, Ehung G, 1991. "Some Theory of Statistical Inference for Nonlinear Science," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(4), pages 697-716, July.
  6. An-Sing Chen, 1997. "The square compass rose: the evidence from Taiwan," Journal of Multinational Financial Management, Elsevier, Elsevier, vol. 7(2), pages 127-144, June.
  7. Kyrtsou, Catherine & Terraza, Michel, 2002. "Stochastic chaos or ARCH effects in stock series?: A comparative study," International Review of Financial Analysis, Elsevier, Elsevier, vol. 11(4), pages 407-431.
  8. Fang, Yue, 2002. "The compass rose and random walk tests," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 39(3), pages 299-310, May.
  9. Capobianco, Enrico, 2003. "Empirical volatility analysis: feature detection and signal extraction with function dictionaries," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 319(C), pages 495-518.
  10. Gleason, Kimberly C. & Lee, Chun I. & Mathur, Ike, 2000. "An explanation for the compass rose pattern," Economics Letters, Elsevier, Elsevier, vol. 68(2), pages 127-133, August.
  11. Wang, Eliza & Hudson, Robert & Keasey, Kevin, 2000. "Tick size and the compass rose: further insights," Economics Letters, Elsevier, Elsevier, vol. 68(2), pages 119-125, August.
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Cited by:
  1. Constantinos E. Vorlow, 2004. "Stock Price Clustering and Discreteness: The "Compass Rose" and Predictability," Papers cond-mat/0408013, arXiv.org.
  2. Katarzyna Bien & Ingmar Nolte & Winfried Pohlmeier, 2011. "An inflated multivariate integer count hurdle model: an application to bid and ask quote dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 26(4), pages 669-707, 06.
  3. Marisa Faggini, 2011. "Chaotic Time Series Analysis in Economics: Balance and Perspectives," Working papers, Former Department of Economics and Public Finance "G. Prato", University of Torino 25, Former Department of Economics and Public Finance "G. Prato", University of Torino.
  4. Viviana Fernandez & Brian M. Lucey, 2006. "Portfolio management implications of volatility shifts: Evidence from simulated data," The Institute for International Integration Studies Discussion Paper Series, IIIS iiisdp131, IIIS.

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