Investment strategies used as spectroscopy of financial markets reveal new stylized facts

Wei-Xing Zhou, Guo-Hua Mu, Wei Chen and Didier Sornette
Additional contact information
Guo-Hua Mu: East China University of Science and Technology
Wei Chen: Shenzhen Stock Exchange
Didier Sornette: ETH Zurich and Swiss Finance Institute

No 11-30, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We propose a new set of stylized facts quantifying the structure of financial markets. The key idea is to study the combined structure of both investment strategies and prices in order to open a qualitatively new level of understanding of financial and economic markets. We study the detailed order flow on the Shenzhen Stock Exchange of China for the whole year of 2003. This enormous dataset allows us to compare (i) a closed national market (A-shares) with an international market (B-shares), (ii) individuals and institutions and (iii) real traders to random strategies with respect to timing that share otherwise all other characteristics. We find in general that more trading results in smaller net return due to trading frictions, with the exception that the net return is independent of the trading frequency for A-share individual traders. We unveiled quantitative power laws with non-trivial exponents, that quantify the deterioration of performance with frequency and with holding period of the strategies used by traders. Random strategies are found to perform much better than real ones, both for winners and losers. Surprising large arbitrage opportunities exist, especially when using zero-intelligence strategies. This is a diagnostic of possible inefficiencies of these financial markets.

Keywords: trading strategies; stylized facts; Shenzhen Stock Exchange of China; investment performance; illusion of control; trading frequency; arbitrage opportunities (search for similar items in EconPapers)
JEL-codes: C15 C53 E47 G17 (search for similar items in EconPapers)
Pages: 19 pages
Date: 2011-08
References: Add references at CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908632 (application/pdf)

Related works:
Journal Article: Investment Strategies Used as Spectroscopy of Financial Markets Reveal New Stylized Facts (2011)
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:chf:rpseri:rp1130

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().