Estimating the Complexity Function of Financial Time Series: An Estimation Based on Predictive Stochastic Complexity
AbstractUsing a measure of predictive stochastic complexity, this paper examines the complexity of two types of financial time series of several Pacific Rim countries, including 11 series on stock returns and 9 series on exchange-rate returns. Motivated by Chaitin's application of Kolmogorov complexity to the definition of "Life," we examine complexity as a function of sample size and call it the complexity function. According to Chaitin (1979), if a time series is truly random, then its complexity should increase at the same rate as the sample size, which means one would not gain or lose any information by fine tuning the sample size. Geometrically, this means that the complexity function is a 45 degree line. Based on this criterion, we estimate the complexity function for 20 financial time series and their iid normal surrogates. It is found that, while the complexity functions of all surrogates lie near to the 45 degree line, those of the financial time series are above it, except for the Indonesian stock return. Therefore, while the complexity of most financial time series is initially low compared to pseudo random time series, it gradually catches up as sample size increases. The catching-up effect indicates a short-lived property of financial signals. This property may lend support to the hypothesis that financial time series are not random but are composed of a sequence of structures whose birth and death can be characterized by a jump process with an embedded Markov chain. The significance of this empirical finding is also discussed in light of the recent progress in financial econometrics. Further exploration of this property may help data miners to select moderate sample sizes in either their data-preprocessing procedures or active-learning designs.
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 1999 with number 1143.
Date of creation: 01 Mar 1999
Date of revision:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Giglio, Ricardo & Matsushita, Raul & Figueiredo, Annibal & Gleria, Iram & Da Silva, Sergio, 2008. "Algorithmic complexity theory and the relative efficiency of financial markets," MPRA Paper 8704, University Library of Munich, Germany.
- Sergio Da Silva & Raul Matsushita & Ricardo Giglio, 2008. "The relative efficiency of stockmarkets," Economics Bulletin, AccessEcon, vol. 7(6), pages 1-12.
- Shu-Heng Chen & Thomas Lux & Michele Marchesi, 1999.
"Testing for Non-Linear Structure in an Artificial Financial Market,"
Discussion Paper Serie B
447, University of Bonn, Germany.
- Chen, Shu-Heng & Lux, Thomas & Marchesi, Michele, 2001. "Testing for non-linear structure in an artificial financial market," Journal of Economic Behavior & Organization, Elsevier, vol. 46(3), pages 327-342, November.
- Brandouy, Olivier & Delahaye, Jean-Paul & Ma, Lin & Zenil, Hector, 2014. "Algorithmic complexity of financial motions," Research in International Business and Finance, Elsevier, vol. 30(C), pages 336-347.
- Yael Alon- Brimer & Armin Shmilovici & Shmuel Hauser, 2002.
"Using a Stochastic Complexity Measure to Check the Efficient Market Hypothesis,"
Computing in Economics and Finance 2002
272, Society for Computational Economics.
- Armin Shmilovici & Yael Alon-Brimer & Shmuel Hauser, 2003. "Using a Stochastic Complexity Measure to Check the Efficient Market Hypothesis," Computational Economics, Society for Computational Economics, vol. 22(2), pages 273-284, October.
- Armin Shmilovici & Yoav Kahiri & Irad Ben-Gal & Shmuel Hauser, 2009.
"Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm,"
Society for Computational Economics, vol. 33(2), pages 131-154, March.
- Y. Kahiri & A. Shmilovici & S. Hauser, 2006. "Measuring the Efficiency of the Intraday Forex Market with a Universal Data Compression Algorithm," Computing in Economics and Finance 2006 256, Society for Computational Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.