Equity prices as a simple harmonic oscillator with noise

Ali Ataullah and Mark Tippett

Physica A: Statistical Mechanics and its Applications, 2007, vol. 382, issue 2, 557-564

Abstract: The centred return on the London Stock Exchange's FTSE All Share Index is modelled as a simple harmonic oscillator with noise over the period from 1 January, 1994 until 30 June 2006. Our empirical results are compatible with the hypothesis that there is a period in the FTSE All Share Index of between two and two and one half years. This means the centred return will on average continue to increase for about a year after reaching the minimum in its oscillatory cycle; alternatively, it will continue on average to decline for about a year after reaching a maximum. Our analysis also shows that there is potential to exploit the harmonic nature of the returns process to earn abnormal profits. Extending our analysis to the low energy states of a quantum harmonic oscillator is also suggested.

Keywords: Brownian motion; Classical mechanics; Econophysics; Harmonic oscillator (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:382:y:2007:i:2:p:557-564

DOI: 10.1016/j.physa.2007.04.010

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