Testing for Detailed Balance in a Financial Market

Rudolf Fiebig and David Musgrove

Papers from arXiv.org

Abstract: We test a historical price time series in a financial market (the NASDAQ 100 index) for a statistical property known as detailed balance. The presence of detailed balance would imply that the market can be modeled by a stochastic process based on a Markov chain, thus leading to equilibrium. In economic terms, a positive outcome of the test would support the efficient market hypothesis, a cornerstone of neo-classical economic theory. In contrast to the usage in prevalent economic theory the term equilibrium here is tied to the returns, rather than the price time series. The test is based on an action functional $S$ constructed from the elements of the detailed balance condition and the historical data set, and then analyzing $S$ by means of simulated annealing. Checks are performed to verify the validity of the analysis method. We discuss the outcome of this analysis.

Date: 2014-03
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://arxiv.org/pdf/1403.3584 Latest version (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:arx:papers:1403.3584

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().