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Could Investors’ Expectations Explain Temporal Variations in Hurst’s Exponent, Loci of Multifractal Spectra, and Statistical Prediction Errors? The Case of the S&P 500 Index

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  • Dominique, C-Rene
  • Rivera-Solis, Luis Eduardo

Abstract

Over the periods 1998-2002 and 2009-2011, the S&P-500 Index went from persistence to anti-persistence mode, as measured by the Hurst index H. To uncover the reasons that characterize such a change, this paper uses a simple method that consists in treating quasi self-similar segments of the Index as initiators, and then finding appropriate generators with two intervals each to asymptotically model the strange attractor. The multifractal formalism shows that the change in persistence implies a corresponding change in the multifractal spectrum, and an enlargement of the invariant equilibrium set, making a market crash more likely, most probably due to a collapse of investors’ expectations. This also means that all statistical predictions made in one mode would have been off by an amount proportional to change in any element of the generalized set of dimensions in the other.

Suggested Citation

  • Dominique, C-Rene & Rivera-Solis, Luis Eduardo, 2012. "Could Investors’ Expectations Explain Temporal Variations in Hurst’s Exponent, Loci of Multifractal Spectra, and Statistical Prediction Errors? The Case of the S&P 500 Index," MPRA Paper 41407, University Library of Munich, Germany, revised 26 Feb 2012.
    • Handle: RePEc:pra:mprapa:41407
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    References listed on IDEAS

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    1. Medio,Alfredo & Gallo,Giampaolo, 1995. "Chaotic Dynamics," Cambridge Books, Cambridge University Press, number 9780521484619, January.
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    3. Muller, Ulrich A. & Dacorogna, Michel M. & Dave, Rakhal D. & Olsen, Richard B. & Pictet, Olivier V. & von Weizsacker, Jacob E., 1997. "Volatilities of different time resolutions -- Analyzing the dynamics of market components," Journal of Empirical Finance, Elsevier, vol. 4(2-3), pages 213-239, June.
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    5. Dominique, C-René & Rivera-Solis, Luis Eduardo, 2011. "Mixed fractional Brownian motion, short and long-term Dependence and economic conditions: the case of the S&P-500 Index," MPRA Paper 34860, University Library of Munich, Germany.
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    Cited by:

    1. Dominique, C-Rene & Rivera-Solis, Luis Eduardo, 2012. "The dynamics of market share’s growth and competition in quadratic mappings," MPRA Paper 43652, University Library of Munich, Germany.

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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C0 - Mathematical and Quantitative Methods - - General
    • G00 - Financial Economics - - General - - - General
    • A10 - General Economics and Teaching - - General Economics - - - General
    • G01 - Financial Economics - - General - - - Financial Crises

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