Power Law Scaling and 'Dragon-Kings' in Distributions of Intraday Financial Drawdowns

Vladimir Filimonov and Didier Sornette
Additional contact information
Vladimir Filimonov: University of Zurich
Didier Sornette: ETH Zurich and Swiss Finance Institute

No 14-48, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We investigate the distributions of e-drawdowns and e-drawups of the most liquid futures financial contracts of the world at time scales of 30 seconds. The e-drawdowns (resp. e-drawups) generalise the notion of runs of negative (resp. positive) returns so as to capture the risks to which investors are arguably the most concerned with. Similarly to the distribution of returns, we find that the distributions of e-drawdowns and e-drawups exhibit power law tails, albeit with exponents significantly larger than those for the return distributions. This paradoxical result can be attributed to (i) the existence of significant transient dependence between returns and (ii) the presence of large outliers (dragon-kings) characterizing the extreme tail of the drawdown/drawup distributions deviating from the power law. The study of the tail dependence between the sizes, speeds and durations of drawdown/drawup indicates a clear relationship between size and speed but none between size and duration. This implies that the most extreme drawdown/drawup tend to occur fast and are dominated by a few very large returns. We discuss both the endogenous and exogenous origins of these extreme events.

Keywords: Extreme events; drawdowns; power law distribution; tail dependence; Dragon-King events; financial markets; high-frequency data (search for similar items in EconPapers)
JEL-codes: C02 C14 C46 G01 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2014-07, Revised 2015-04
References: Add references at CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://ssrn.com/abstract=2468195 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1448

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().