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Fractal Market Hypothesis and Markov Regime Switching Model: A Possible Synthesis and Integration

Author

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  • Mishelle Doorasamy

    (School of Accounting, Economics and Finance, University of Kwa-Zulu Natal, Westville campus, South Africa,)

  • Prince Kwasi Sarpong

    (School of Accounting, Economics and Finance, University of Kwa-Zulu Natal, Westville campus, South Africa,)

Abstract

Peters (1994) proposed the fractal market hypothesis (FMH) as an alternative to the efficient market hypothesis, following his criticism of the EMH. In this study, we analyse whether the fractal nature of a financial market determines its riskiness and degree of persistence as measured by its Hurst exponent. To do so, we utilize the Markov Switching Model to derive a persistence index (PI) to measure the level of persistence of selected indices on Johannesburg Stock Exchange (JSE) and four other international stock markets. We conclude that markets with high Hurst exponents, show stronger persistence and less risk relative to markets with lower Hurst exponents.

Suggested Citation

  • Mishelle Doorasamy & Prince Kwasi Sarpong, 2018. "Fractal Market Hypothesis and Markov Regime Switching Model: A Possible Synthesis and Integration," International Journal of Economics and Financial Issues, Econjournals, vol. 8(1), pages 93-100.
    • Handle: RePEc:eco:journ1:2018-01-13
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    Cited by:

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    2. Alexander V Laktyunkin & Alexander A Potapov, 2020. "Impact of COVID-19 on the Financial Crisis - Calculation of Fractal Parameters," Biomedical Journal of Scientific & Technical Research, Biomedical Research Network+, LLC, vol. 30(5), pages 23768-23772, October.

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    More about this item

    Keywords

    Fractal Market Hypothesis; Markov Switching Model; Efficient Market Hypothesis;
    All these keywords.

    JEL classification:

    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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