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Identifying the Transition from Efficient-Market to Herding Behavior: Using a Method from Econophysics

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  • María José Muñoz Torrecillas
  • Rossitsa Yalamova
  • Bill McKelvey

Abstract

We test whether “detrended fluctuation analysis” (DFA)—an econophysics method—identifies the transition from efficient-market trading to herding behavior and the rise of the NASDAQ dot.com stock market bubble. DFA divides a time series into “segments” of varying lengths and then tests whether power-law distributions exist within the segments. A power-law distribution of stock-price changes within a segment indicates herding behavior and the start of the dot.com bubble. The clarity of the transition indication depends on both segment lengths and segment starting dates. Our findings show that DFA can be used to identify the beginning of stock-market bubbles but not the beginning of crashes.

Suggested Citation

  • María José Muñoz Torrecillas & Rossitsa Yalamova & Bill McKelvey, 2016. "Identifying the Transition from Efficient-Market to Herding Behavior: Using a Method from Econophysics," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 17(2), pages 157-182, April.
    • Handle: RePEc:taf:hbhfxx:v:17:y:2016:i:2:p:157-182
    DOI: 10.1080/15427560.2016.1170680
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    Cited by:

    1. Yi, Eojin & Ahn, Kwangwon & Choi, M.Y., 2022. "Cryptocurrency: Not far from equilibrium," Technological Forecasting and Social Change, Elsevier, vol. 177(C).
    2. Ravi Kashyap, 2019. "Imitation in the Imitation Game," Papers 1911.06893, arXiv.org.

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