Exploring the influence of industries and randomness in stock prices

Ivan Contreras (), J. Ignacio Hidalgo and Laura Nuñez Letamendia ()
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Ivan Contreras: Universitat de Girona
J. Ignacio Hidalgo: Universidad Complutense de Madrid

Empirical Economics, 2018, vol. 55, issue 2, No 14, 713-729

Abstract: Abstract This study explores the behavior of time series of historical prices and makes two additional contributions to the literature. In summarized form, we present an overview of each of the financial theories that discuss the movements of stock prices and their connection with industry trends. Within this theoretical framework, we first propose that prices be distinguished by following stock prices and a random-walk approach, and second, that the analysis of historical prices be broken down by industries. Similarities among price series are extracted through a clustering methodology based on an approach to non-computable Kolmogorov complexity. We model price series by following geometric Brownian motion and compare them to historical series of stock prices. Our first contribution confirms the existence of hidden common patterns in time series of historical prices that are clearly distinguishable from simulated series. The second contribution claims strong connections among firms carrying out similar industrial activities. The results confirm that stock prices belonging to the same industry behave similarly, whereas they behave differently from those of firms in other industries. Our research sheds new light on the stylized feature of the non-randomness of stock prices by pointing at fundamental aspects related to the industry as partial explanatory factors behind price movements.

Keywords: Time series; Stock prices; Information theory; Random walk; Industry analysis; Macroeconomic analysis; Clustering (search for similar items in EconPapers)
JEL-codes: C63 C81 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s00181-017-1303-9

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