Identifying the Transition from Efficient-Market to Herding Behavior: Using a Method from Econophysics

María José Muñoz Torrecillas, Rossitsa Yalamova and Bill McKelvey

Journal of Behavioral Finance, 2016, vol. 17, issue 2, 157-182

Abstract: We test whether “detrended fluctuation analysis” (DFA)—an econophysics method—identifies the transition from efficient-market trading to herding behavior and the rise of the NASDAQ dot.com stock market bubble. DFA divides a time series into “segments” of varying lengths and then tests whether power-law distributions exist within the segments. A power-law distribution of stock-price changes within a segment indicates herding behavior and the start of the dot.com bubble. The clarity of the transition indication depends on both segment lengths and segment starting dates. Our findings show that DFA can be used to identify the beginning of stock-market bubbles but not the beginning of crashes.

Date: 2016
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DOI: 10.1080/15427560.2016.1170680

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