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Price clustering and discreteness: is there chaos behind the noise?

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  • Antoniou, Antonios
  • Vorlow, Constantinos E.

Abstract

We investigate the “compass rose” patterns introduced by Crack and Ledoit (J. Finance 51(2)(1996) 751) as revealed in phase portraits (delay plots) of stock returns. The structures observed in these diagrams have been attributed mainly to price clustering and discreteness and the tick size. Using wavelet-based denoising, we examine the noise-free versions of a set of FTSE100 stock returns time series. We reveal evidence of non-periodic cyclical dynamics. As a second stage we apply surrogate data analysis on the original and denoised stock returns. Our results suggest that there is a strong nonlinear and possibly deterministic signature in the data generating processes of the stock returns sequences.

Suggested Citation

  • Antoniou, Antonios & Vorlow, Constantinos E., 2005. "Price clustering and discreteness: is there chaos behind the noise?," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 348(C), pages 389-403.
    • Handle: RePEc:eee:phsmap:v:348:y:2005:i:c:p:389-403
    DOI: 10.1016/j.physa.2004.09.006
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    Cited by:

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    2. Katarzyna Bien & Ingmar Nolte & Winfried Pohlmeier, 2011. "An inflated multivariate integer count hurdle model: an application to bid and ask quote dynamics," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 26(4), pages 669-707, June.
    3. Fernandez, Viviana & Lucey, Brian M., 2007. "Portfolio management under sudden changes in volatility and heterogeneous investment horizons," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 375(2), pages 612-624.
    4. repec:wyi:journl:002092 is not listed on IDEAS
    5. John Francis Diaz & Jo-Hui Chen, 2017. "Testing for Long-memory and Chaos in the Returns of Currency Exchange-traded Notes (ETNs)," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(4), pages 1-2.
    6. Emmanuel Haven & Xiaoquan Liu & Chenghu Ma & Liya Shen, 2013. "Revealing the Implied Risk-neutral MGF with the Wavelet Method," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    7. Katarzyna Bien & Ingmar Nolte & Winfried Pohlmeier, 2008. "A multivariate integer count hurdle model: theory and application to exchange rate dynamics," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 31-48, Springer.
    8. Chakrabarty, Anindya & De, Anupam & Gunasekaran, Angappa & Dubey, Rameshwar, 2015. "Investment horizon heterogeneity and wavelet: Overview and further research directions," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 429(C), pages 45-61.
    9. Leontitsis, Alexandros & Vorlow, Constantinos E., 2006. "Accounting for outliers and calendar effects in surrogate simulations of stock return sequences," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 368(2), pages 522-530.
    10. Münnix, Michael C. & Schäfer, Rudi & Guhr, Thomas, 2010. "Impact of the tick-size on financial returns and correlations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(21), pages 4828-4843.
    11. Marisa Faggini, 2011. "Chaotic Time Series Analysis in Economics: Balance and Perspectives," Working papers 25, Former Department of Economics and Public Finance "G. Prato", University of Torino.
    12. repec:wyi:journl:002097 is not listed on IDEAS
    13. Mitchell, Heather & McKenzie, Michael D., 2006. "A note on the Wang and Wang measure of the quality of the compass rose," Journal of Banking & Finance, Elsevier, vol. 30(12), pages 3519-3524, December.
    14. Haven, Emmanuel & Liu, Xiaoquan & Ma, Chenghu & Shen, Liya, 2009. "Revealing the implied risk-neutral MGF from options: The wavelet method," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 692-709, March.
    15. Marisa Faggini & Bruna Bruno & Anna Parziale, 2019. "Does Chaos Matter in Financial Time Series Analysis?," International Journal of Economics and Financial Issues, Econjournals, vol. 9(4), pages 18-24.

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