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Elucidation of Chaotic Market Hypothesis Based on Ergodic Theory

In: Creative Complex Systems

Author

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  • Ken Umeno

    (Kyoto University
    Kyoto University)

Abstract

We develop a method of directly testifying the efficient market hypothesis (EMH)Efficient Market Hypothesis proposed by Fama by using the ergodic theoryErgodic theory to connect microscopic price fluctuations with macroscopic behavior. After testing the validity of the method by using exactly solvable chaosExactly Solvable Chaos, we found a novel periodic structure in the 5-min chart data of the Nikkei averages in 2019 with our developed new correlation functionCorrelation function based on the characteristic functionCharacteristic function. This directly denies the EMHEfficient Market Hypothesis. Statistical data of the empirical studies have shown that a stable lawStable law well describes the price fluctuations of financial markets as predicted by the most generalized version of the central limit theoremCentral limit theorem called the universal super generalized central limit theorem (USGCLT) we discovered recently. The concept and proof of the extension of the super generalized central limit theorem (SGCLT) is also given to illustrate the mechanism of universality such that a sum of random numbers with nonidentical power law distributions converges to a stable lawStable law in distribution. With these theoretical facts together with the empirical fact of the data denying the EMHEfficient Market Hypothesis, we propose the chaotic market hypothesis (CMH) based on the ergodic theoryErgodic theory to capture the essential characteristics of the financial markets.

Suggested Citation

  • Ken Umeno, 2021. "Elucidation of Chaotic Market Hypothesis Based on Ergodic Theory," Creative Economy, in: Kazuo Nishimura & Masatoshi Murase & Kazuyoshi Yoshimura (ed.), Creative Complex Systems, chapter 0, pages 165-187, Springer.
  • Handle: RePEc:spr:crechp:978-981-16-4457-3_12
    DOI: 10.1007/978-981-16-4457-3_12
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