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Investment Implications Of The Fractal Market Hypothesis

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  • ADAM KARP

    (School of Economics, Department of Risk Management, North-West University Potchefstroom Campus, South Africa)

  • GARY VAN VUUREN

    (School of Economics, Department of Risk Management, North-West University Potchefstroom Campus, South Africa)

Abstract

The Efficient Market Hypothesis (EMH) has been repeatedly demonstrated to be an inferior — or at best incomplete — model of financial market behavior. The Fractal Market Hypothesis (FMH) has been installed as a viable alternative to the EMH. The FMH asserts that markets are stabilized by matching demand and supply of investors’ investment horizons while the EMH assumes that the market is at equilibrium. A quantity known as the Hurst exponent determines whether a fractal time series evolves by random walk, a persistent trend or mean reverts. The time dependence of this quantity is explored for two developed market indices and one emerging market index. Another quantity, the fractal dimension of a time series, provides an indicator for the onset of chaos when market participants behave in the same way and breach a given threshold. A relationship is found between these quantities: the larger the change in the fractal dimension before breaching, the larger the rally in the price index after the breach. In addition, breaches are found to occur principally during times when the market is trending.

Suggested Citation

  • Adam Karp & Gary Van Vuuren, 2019. "Investment Implications Of The Fractal Market Hypothesis," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 14(01), pages 1-27, March.
    • Handle: RePEc:wsi:afexxx:v:14:y:2019:i:01:n:s2010495219500015
    DOI: 10.1142/S2010495219500015
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    3. L.J. Basson & Sune Ferreira-Schenk & Zandri Dickason-Koekemoer, 2022. "Fractal Dimension Option Hedging Strategy Implementation During Turbulent Market Conditions in Developing and Developed Countries," International Journal of Economics and Financial Issues, Econjournals, vol. 12(2), pages 84-95, March.
    4. 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.
    5. Peter Albrecht & Svatopluk Kapounek & Zuzana Kučerová, 2023. "Economic policy uncertainty and stock markets’ co‐movements," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(4), pages 3471-3487, October.

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