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Fractal Markets Hypothesis And The Global Financial Crisis: Scaling, Investment Horizons And Liquidity

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  • LADISLAV KRISTOUFEK

    (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Opletalova 26, 110 00, Prague, Czech Republic;
    Institute of Information Theory and Automation, Academy of Sciences of the Czech Republic, Pod Vodarenskou vezi 4, 182 08, Prague, Czech Republic)

Abstract

We investigate whether the fractal markets hypothesis and its focus on liquidity and investment horizons give reasonable predictions about the dynamics of the financial markets during turbulences such as the Global Financial Crisis of late 2000s. Compared to the mainstream efficient markets hypothesis, the fractal markets hypothesis considers the financial markets as complex systems consisting of many heterogenous agents, which are distinguishable mainly with respect to their investment horizon. In the paper, several novel measures of trading activity at different investment horizons are introduced through the scaling of variance of the underlying processes. On the three most liquid US indices — DJI, NASDAQ and S&P500 — we show that the predictions of the fractal markets hypothesis actually fit the observed behavior adequately.

Suggested Citation

  • Ladislav Kristoufek, 2012. "Fractal Markets Hypothesis And The Global Financial Crisis: Scaling, Investment Horizons And Liquidity," Advances in Complex Systems (ACS), World Scientific Publishing Co. Pte. Ltd., vol. 15(06), pages 1-13.
    • Handle: RePEc:wsi:acsxxx:v:15:y:2012:i:06:n:s0219525912500658
    DOI: 10.1142/S0219525912500658
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