A Critical Review of the Main Approaches on Financial Market Dynamics Modelling

Open access

Abstract

While the interpretation of the EMH has changed over the last 50 years, its meaningfulness continues to define our view on how financial markets work. Competing approaches such as BFT and ACT have been proven to be in particular cases of an infinite spectrum of market states; all come under the framework of the AMH. The flexible framework of the AMH enables a trans-disciplinary approach for the study of financial system dynamics. An evolutionary and contextual view on financial systems allows researchers to use techniques and instruments from quantum mechanics and statistical physics to quantify volatility and provide an interpretation to the cognitive processes underlying investor decision making. Such a context also enables to tackle the interpretation of information processing at a cognitive level through consideration of quantum effects in the price formation mechanism.

Bachelier, L., 1900, Theorie de la speculation, Annales Scientifiques de l’Ecole Normale Superiere, 3rd Series, Vol. 17, pg. 21−86, available at http://archive.numdam.org/ARCHIVE/ASENS/ASENS_1900_3_17_/ASENS_1900_3_17__21_0/ASENS_1900_3_17__21_0.pdf

Ball, R., 2009, The Global Financial Crisis and the Efficient Market Hypothesis: What Have We Learned?, Journal of Applied Corporate Finance, Vol. 21 No. 4, pg. 8–16, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1502815

Barberis, N., Shleifer, A., Vishny, R., 1997, A Model of Investor Sentiment, NBER, Working Paper No. 5926, available at http://faculty.som.yale.edu/nicholasbarberis/bsv_jnl.pdf

Barberis, N., Thaler, R., 2002, A Survey of Behavioral Finance, NBER, Working Paper No. 9222, available at http://faculty.som.yale.edu/nicholasbarberis/ch18_6.pdf

Battiston, S., Gatti, D.D., Gallegati, M., Greenwald, B.C., Stiglitz, J.E., 2009, Liaisons Dangereuses: Increasing Connectivity, Risk Sharing, And Systemic Risk, NBER, Working Paper No. 15611, available at http://www.nber.org/papers/w15611.pdf

Black, F., Scholes, M., 1973, The pricing of options and corporate liabilities, Journal of Political Economy 81 (3), pg. 637665, available at http://efinance.org.cn/cn/FEshuo/The%20Pricing%20of%20Options%20and%20Corporate%20Liabilities.pdf

Bohm, D., Hiley, B., 1993, The Undivided Universe: An Ontological Interpretation of Quantum Theory, Routledge, First Edition, available at http://www.researchgate.net/publication/224043431_The_Undivided_Universe_An_Ontological_Interpretation_of_Quantum_Mechanics

Campbell, J. Y., Lo, A. W., MacKinlay, A. C., 1997, The Econometrics of Financial Markets, Princeton University Press, available at https://is.muni.cz/el/1456/podzim2011/MPM_AEM1/10730658/10732669/9294156/el_456_jaro2009/NotSortedYet/Campbell_Lo___MacKinlay_1997_The_Econometrics_of_Financial_Markets.pdf

Chaitin, G. J., 1966, On the Length of Programs for Computing Finite Binary Sequences, J. Assoc. Comp. Math., Vol. 13, pg. 547–569, available at https://www.cs.auckland.ac.nz/~chaitin/acm66.pdf

Chakrabortia, A., Tokea, I.M., Patriarcab, M., Abergela, F., 2011, Econophysics : Empirical facts and agent-based models, available at http://xxx.tau.ac.il/pdf/0909.1974.pdf

Chan, K., Gup, B., Pan, M.S., 1997, International Stock Market Efficiency and Integration: A Study of Eighteen Nations, Journal of Business Finance & Accounting, Vol. 24, No. 6, pg. 803–813, available at http://onlinelibrary.wiley.com/doi/10.1111/1468-5957.00134/abstract

Chen, J., 2003, An Entropy Theory of Psychology and its Implication to Behavioral Finance, Financiele Studievereniging Rotterdam Forum, Vol. 6, pg. 26–31, available at http://web.unbc.ca/~chenj/papers/psychology.pdf

Chen J., 2005, Information Theory and Market Behavior, ICFAI Journal of Behavioral Finance, 2(4), 25–45, available at http://web.unbc.ca/~chenj/papers/info.pdf

Choustova, O., 2007, Toward quantum-like modeling of financial processes, arXiv:quantph/0109122v5, available at http://arxiv.org/pdf/quant-ph/0109122.pdf

Cont, R., 2001, Empirical properties of asset returns: stylized facts and statistical issues, Quantitative Finance, Vol. 1 (2), pg. 223–236, available at http://wwwstat.wharton.upenn.edu/~steele/Resources/FTSResources/StylizedFacts/Cont2001.pdf

Cont, R., Potters, M., Bouchaud, J.P., 1997, Scale Invariance and Beyond, SSRN eLibrary, available at http://www.springer.com/physics/complexity/book/978-3-540-64000-4

Coval, J., Moskowitz, T., 2001, The geography of investment: Informed trading and asset prices, Journal of Political Economy, Vol. 54, pg. 1–39, available at http://www.people.hbs.edu/jcoval/Papers/Geography.pdf

Daniel, K., Hirshleifer, D., Subrahmanyam, A., 1998, Investor Psychology and Security Market under- and Overreactions, The Journal of Finance, Vol. 53, No. 6, pg. 1839–1885, available at http://deepblue.lib.umich.edu/handle/2027.42/73431

De Bondt, W., Thaler, R., 1985, Does the Stock Market Overreact?, Journal of Finance, Vol. 40, No. 3, pg. 793–805, available at http://home.business.utah.edu/finmll/fin787/papers/debondtthaler1985.pdf

De Long, B., Shleifer, A., Summers, L., Waldmann, R., 1990, Noise Trader Risk in Financial Markets, The Journal of Political Economy, Vol. 98, No. 4, pg. 703–738, available at http://ms.mcmaster.ca/~grasselli/DeLongShleiferSummersWaldmann90.pdf

Dima, B., Pasca, L., Preda, C., 2015, A financial wave model for stock indices, Journal of Economic Computation and Economic Cibernetics Studies and Research, Issue 4/2015, available at http://www.ecocyb.ase.ro/nr20154/01%20-%20Dima%20Bogdan,%20Lucian%20PASCA.pdf

Eisert, J., Wilkens, M., Lewenstein, M., 1999, Quantum games and quantum strategies, Phys. Rev. Lett. 83, pg. 3077–3080, available at http://arxiv.org/pdf/quant-ph/9806088v3.pdf

Fama, E., 1965, The behavior of stock market prices, Journal of Business, Vol. 38, pg. 34–105, available at http://stevereads.com/papers_to_read/the_behavior_of_stock_market_prices.pdf

Fama, E.F., 1970, Efficient Capital Markets: A Review of Theory and Empirical Work, Journal of Finance, Vol. 25, pg. 383, available at http://efinance.org.cn/cn/fm/Efficient%20Capital%20Markets%20A%20Review%20of%20Theory%20and%20Empirical%20Work.pdf

Ghirardi, G.C., Rimini, A., Weber, T., 1986, Unified dynamics for microscopic and macroscopic systems, Physical Review D, Vol. 34, Issue. 2, available at http://journals.aps.org/prd/abstract/10.1103/PhysRevD.34.470

Goncalves, C.P., Goncalves, C., 2007, An Evolutionary Quantum Game Model of Financial Market Dynamics − Theory and Evidence, Working Paper, Social Science Research Network, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=982086

Gopikrishnan, P., Plerou, V., Amaral, L.N., Meyer, M., Stanley, H.E., 1999, Scaling of the distribution of fluctuations of financial market indices, Physical Review E, 60, pg. 5305–5316, available at http://arxiv.org/pdf/cond-mat/9905305.pdf

Grossman, S.J., Stiglitz, J.E., 1980, On the Impossibility of Informaționally Efficient Markets, The American Economic Review, pg. 393−408, available at https://www.aeaweb.org/aer/top20/70.3.393-408.pdf

Guillaume, D., Dacorogna, M., Dave, R., Muller, U., Olsen, R., Pictet, O., 1997, From the bird’s eye to the microscope: A survey of new stylized facts of the intra-daily foreign exchange markets, Finance and Stochastics 1 (2), pg. 95–129, available at http://ww.long-memory.com/returns/Guillaume-etal1997.pdf

Haigh, M., List, J., 2005, Do professional traders exhibit myopic loss aversion? An experimental analysis, Journal of Finance, Forthcoming, available at http://karlan.yale.edu/fieldexperiments/papers/00052.pdf

Haven, E., 2002, A discussion on embedding the Black–Scholes option pricing model ina quantum physics setting, Physica A 304 (2002) 507–524, available at http://www.sciencedirect.com/science/article/pii/S0378437101005684

Haven, E., 2003, An ’h-Brownian motion’ of stochastic option prices, Physica A, Vol. 344, pg. 151–155

Haven, E., 2005, Pilot-wave theory and financial option pricing, International Journal of TheoreticalPhysics 44 (11), pg. 1957–1962, available at http://link.springer.com/article/10.1007%2Fs10773-005-8973-3#page-1

Haugen, A., 1996, The New Finance: The Case Against Efficient Markets, Pearson, available at http://www.jstor.org/discover/10.2307/2329361?uid=3738920&uid=2&uid=4&sid=21104551934331

Hiley, B., Pylkkanen, P., 1997, Active information and cognitive science—A reply to Kieseppa, Pylkkanen, P., Pylkko, P., A. Hautamaki (Eds.), Brain, Mind and Physics, IOS Press, Amsterdam, pg. 123, available at http://books.google.ro/books?id=IdEpIXyXew4C&pg=PA64&redir_esc=y

Huberman, G., Regev, T., 2001, Contagious Speculation and a Cure for Cancer: A Nonevent that Made Stock Prices Soar, The Journal of Finance, Vol. 56, No. 1, available at http://onlinelibrary.wiley.com/doi/10.1111/0022-1082.00330/abstract

Ivkovic, Z., Weisbenner, S., 2005, Local does as local is: Information content of the geography of individual investors’ common stock investments, Journal of Finance, Vol. 60, pg. 267–306, available at http://www.business.illinois.edu/weisbenn/RESEARCH/PAPERS/JF_Locality_Feb2005_267-306.pdf

Jondeau, E., Poon, S.H., Rockinger, M., 2007, Financial Modeling Under Non-Gaussian Distributions, Springer Verlag, Springer Finance, available at http://www.gbv.de/dms/ilmenau/toc/508397626.PDF

Kacperczyk, M., Sialm, C., Zheng, L., 2005, On the industry concentration of actively managed equity mutual funds, Journal of Finance, Vol. 60, pg. 1983–2011, available at http://pages.stern.nyu.edu/~sternfin/mkacperc/public_html/conc.pdf

Khrennikov, A., 2007, Quantum-like Probabilistic Models outside Physics, arXiv:physics/0702250, available at http://arxiv.org/pdf/physics/0702250.pdf

Kolmogorov, A. N., 1965, Three Approaches to the Quantitative Definition of Information, Problems of Information Transmission Vol. 1, No. 4, available at http://www.tandfonline.com/doi/abs/10.1080/00207166808803030?journalCode=gcom20#.VGfIavmsVFo

LeRoy, S., 1976, Efficient capital markets: Comment, Journal of Finance, Vol. 31, pg. 139–141, available at http://www.e-m-h.org/LeRo76.pdf

LeRoy, S., Porter, D., 1981, The present-Value Relation: Tests Based on Implied Variance Bounds, Econometrica, Vol. 49, No. 3, pg. 555–574, available at http://www.jstor.org/discover/10.2307/1911512?uid=3738920&uid=2&uid=4&sid=21104551934331

Lo, A.W., Khandani, A.E., 2008, What Happened To The Quants inAugust 2007?, NBER, Working Paper No. 14465, available at http://web.mit.edu/alo/www/Papers/august07.pdf

Lo, A.W., MacKinlay, C., 2001, A Non-Random Walk Down Wall Street, Princeton University Press, available at https://is.muni.cz/el/1456/jaro2009/PMAPEM/NotSortedYet/A_Non-Random_Walk_down_Wall_Street__Lo__MacKinlay_pdf

Lo, A.W., 2004, The Adaptive Markets Hypothesis: Market Efficiency from an Evolutionary Perspective, Journal of Portfolio Management, a 30-a Lansare Aniversare, pg. 15–29, available at http://opim.wharton.upenn.edu/~sok/papers/l/JPM2004.pdf

Maillet, B., Michel, T., 2003, An index of market shocks based on multiscale analysis, Quant. Finance Vol. 3, pg. 88–97, available at http://www.tandfonline.com/doi/abs/10.1088/1469-7688/3/2/303?journalCode=rquf20#.VGffCfmsVFo

Malkiel, B., 2003, The Efficient Market Hypothesis and Its Critics, Journal of Economic Perspectives, Vol. 17, No. 1, pg. 59–82, available at http://eml.berkeley.edu/~craine/EconH195/Fall_14/webpage/Malkiel_Efficient%20Mkts.pdf

Malloy, C., 2005, The geography of equity analysis, Journal of Finance, Vol. 60, pg. 719–755, available at http://onlinelibrary.wiley.com/doi/10.1111/j.1540-6261.2005.00744.x/abstract

Mandelbrot, B., 1969, Long-Run Linearity, Locally Gaussian Process, H-Spectra And Infinite Variances, International Economic Review, Vol. 10, No. 1, pg. 82–111,

Mandelbrot, B., 1963, New methods instatistical economics, Journal of Political Economy, 71:421–440, available at http://users.math.yale.edu/~bbm3/web_pdfs/032statisticalEconomics.pdf

Mandelbrot, B., 1967, The variation of some other speculative prices, The Journal of Business, Vol. 40. No. 4, pg. 393–413, available at http://web.williams.edu/Mathematics/sjmiller/public_html/341Fa09/econ/Mandelbroit_VariationCertainSpeculativePrices.pdf

Mantegna, R.N., Stanley, H.E., 2000, An Introduction to Econophysics: Correlations and Complexity inFinance, Cambridge University Press, available at http://polymer.bu.edu/hes/book-mantegna00stanley.pdf

Merton, R., 1973, Theory of rational option pricing, The Bell Journal of Economics and Management Science, pg. 141–183, available at http://www.people.hbs.edu/rmerton/Theory%20of%20Rational%20Option%20Pricing.pdf

Meyer, D.A., 1999, Quantum strategies, Phys. Rev. Lett. 82, pg. 1052–1055, available at http://arxiv.org/pdf/quant-ph/9804010v1.pdf

Negrea, B., 2014, A statistical measure of financial crises magnitude, Physica A 397, pg. 54–75, available at http://www.sciencedirect.com/science/article/pii/S0378437113010972

Pagan, A., 1996, The econometrics of financial markets, Journal of Empirical Finance, No. 3 (1), pg. 15–102, available at http://press.princeton.edu/titles/5904.html

Peters, E., 1994, Fractal Market Analysis: Applying Chaos Theory to Investment and Economics, Wiley, New York, available at http://eu.wiley.com/WileyCDA/WileyTitle/productCd-0471585246.html

Piotrowski, E.W., 2003, Fixed point theorem for simple quantum strategies inquantum market games, Physica A, Vol. 324, pg. 196–200, available at http://arxiv.org/pdf/quantph/0210183.pdf

Piotrowski, E.W., Sladkowski, J., 2004, Quantum games infinance, arXiv:quantph/0406129v1, available at http://arxiv.org/pdf/quant-ph/0406129.pdf

Rubinstein, M., 2001, Rational Markets: Yes or No? The Affirmative Case, Financial Analysts Journal, Vol. 57, No. 3, pg. 15–29, available at http://www.haas.berkeley.edu/groups/finance/WP/rpf294.pdf

Samuelson, P. A., 1965, Proof That Properly Anticipated Prices Fluctuate Randomly, Industrial Management Review, 6:2, pg. 41, Spring, available at http://stevereads.com/papers_to_read/proof_that_properly_anticipated_prices_fluctuate_randomly.pdf

Segal, W., Segal, I.E., 1998, The black-Scholes pricing formula inthe quantum context, Proceeding of National Academy of Sciences of the USA, Vol. 95, pg. 4072–4075, available at http://venus.usc.edu/PAPERS/RKHS/Segal3.pdf

Shannon, C., 1948, A mathematical theory of communication, The Bell System Technical Journal, Vol. 27, pg. 379–423, pg. 623–656, available at http://cm.bell-labs.com/cm/ms/what/shannonday/shannon1948.pdf

Shanthikumar, D., 2004, Small Trader Reactions to Consecutive Earnings Surprises, working paper, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=449882

Shiller, R., 1981, Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?, The American Economic Review, pp. 421−436, June, available at https://www.aeaweb.org/aer/top20/71.3.421-436.pdf

Shiryaev, A. N., 1999, Essentials of Stochastic Finance: Facts, Models, Theory, World Scientific Publishing Company, Singapore, available at ftp://150.146.129.243/incoming/ifa.rm.cnr.it/Francesco.Cairo/Public/econo/Binder1.pdf

Smith, V., Suchanek, G., Williams, A., 1988, Bubbles, Crashes, and Endogenous Expectations inExperimental Spot Asset Markets, Econometrica, Vol. 56, No. 5, pg. 1119–1151, September, available at http://teaching.ust.hk/~bee/papers/040918/1988-Smith_etal-bubbles.pdf

Sornette, D., 2009, Dragon-Kings, Black Swans and the Prediction of Crises, International Journal of Terraspace Science and Engineering, Vol. 2, Issue 1, December, available at http://arxiv.org/ftp/arxiv/papers/0907/0907.4290.pdf

Sornette, D., 2003, Why Stock Markets Crash. Critical Events inComplex Financial Systems, Princeton University Press, available at http://press.princeton.edu/titles/7341.html

Verheyden, T., De Moor, L., Van den Bossche, P. 2013, A Tale of Market Efficiency, Hub Research Papers, April, available at http://www.capitant.be/assets/files/thesis/thesis12.pdf

Weber, P., Wang, F., Vodenska-Chitkushev, I., Havlin, S., Stanley, H.E., 2007, Relation between volatility correlations infinancial markets and Omori processes occurring on all scales, Physical Review E, 76, 016109, available at http://journals.aps.org/pre/abstract/10.1103/PhysRevE.76.016109

Zumbach, G., Dacorogna, M., Olsen, J., Olsen, R., 2000, Measuring shocks infinancial markets, Int. J. Theor. Appl. Finance 3, pg. 347–355, available at http://www.researchgate.net/publication/263868774_MEASURING_SHOCK_IN_FINANCIAL_MARKETS

Journal Information

Metrics

All Time Past Year Past 30 Days
Abstract Views 0 0 0
Full Text Views 308 308 17
PDF Downloads 98 98 7