Modeling stock markets through the reconstruction of market processes

Jo\~ao Pedro Rodrigues do Carmo

Papers from arXiv.org

Abstract: There are two possible ways of interpreting the seemingly stochastic nature of financial markets: the Efficient Market Hypothesis (EMH) and a set of stylized facts that drive the behavior of the markets. We show evidence for some of the stylized facts such as memory-like phenomena in price volatility in the short term, a power-law behavior and non-linear dependencies on the returns. Given this, we construct a model of the market using Markov chains. Then, we develop an algorithm that can be generalized for any N-symbol alphabet and K-length Markov chain. Using this tool, we are able to show that it's, at least, always better than a completely random model such as a Random Walk. The code is written in MATLAB and maintained in GitHub.

Date: 2018-03
New Economics Papers: this item is included in nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1803.06653

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