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Critical reflexivity in financial markets: a Hawkes process analysis

Listed author(s):
  • Stephen J. Hardiman
  • Nicolas Bercot
  • Jean-Philippe Bouchaud
Registered author(s):

    We model the arrival of mid-price changes in the E-Mini S&P futures contract as a self-exciting Hawkes process. Using several estimation methods, we find that the Hawkes kernel is power-law with a decay exponent close to -1.15 at short times, less than approximately 10^3 seconds, and crosses over to a second power-law regime with a larger decay exponent of approximately -1.45 for longer times scales in the range [10^3, 10^6] seconds. More importantly, we find that the Hawkes kernel integrates to unity independently of the analysed period, from 1998 to 2011. This suggests that markets are and have always been close to criticality, challenging a recent study which indicates that reflexivity (endogeneity) has increased in recent years as a result of increased automation of trading. However, we note that the scale over which market events are correlated has decreased steadily over time with the emergence of higher frequency trading.

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    File URL: http://arxiv.org/pdf/1302.1405
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    Paper provided by arXiv.org in its series Papers with number 1302.1405.

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    Date of creation: Feb 2013
    Date of revision: Jun 2013
    Handle: RePEc:arx:papers:1302.1405
    Contact details of provider: Web page: http://arxiv.org/

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    1. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "Varieties of Crises and Their Dates," Introductory Chapters,in: This Time Is Different: Eight Centuries of Financial Folly Princeton University Press.
    2. Reinhart, Karmen & Rogoff, Kenneth, 2009. ""This time is different": panorama of eight centuries of financial crises," Economic Policy, Russian Presidential Academy of National Economy and Public Administration, vol. 1, pages 77-114, March.
    3. Oecd, 2002. "Access for Business," OECD Digital Economy Papers 67, OECD Publishing.
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