Non-Extensitivity versus informative moments for financial models: a unifying framework and empirical results

Information-theoretic approaches still play a minor role in financial market analysis. Nonetheless, there have been two very similar approaches evolving during the last years, one in so-called econophysics and the other in econometrics. Both generalize the notion of GARCH processes in an information-theoretic sense and are able to capture skewness and kurtosis better than traditional models. In this article we present both approaches in a more general framework and compare their performance in some illustrative data sets. --Entropy density,Skewness,Kurtosis,GARCH

Financial Market Analysis Using a Kinetics Model

Over the past several decades physicists have used   models and techniques that were developed in the  sciences in order to analyze the price and volume behavior of financial markets.   These models and techniques include  the application of nonextensive thermodynamic statistics, information entropy, and  detrended fluctuation analysis.   This thesis extends the aforementioned approaches to   include the use of chemical kinetics concepts.  We create two-state models of stock market trading records -   models where the stock is treated as being in either an increasing (I) state  or a decreasing (D) state.  We then treat the transition from one state to the other   using standard reaction kinetic methodologies.  We supplement the kinetic analysis with analysis of the autocorrelation function.  We apply this approach to both closing prices and to trading volumes.  In both the closing price and the volume models,   we find that that the processes are not strictly Markovian   but instead exhibit some perturbation due to memory effects.  The closing price model shows evidence of momentum effects in stock pricing  while the volume model captures autocorrelations centered around  the quarterly earnings report cycle.  M.A

The stable long-run CAPM and the cross-section of expected returns

The capital-asset-pricing model (CAPM) is one of the most popular methods of financial market analysis. But, evidence of the poor empirical performance of the CAPM has accumulated in the literature. For example, based on their empirical results regarding the relation between market Beta and average return, Fama and French (1996) conclude that the CAPM is no longer a useful tool for empirical financial market analysis. Most empirical studies of the conventional CAPM take, however, neither the fat-tails of return data nor the price relationship between an asset of interest and the bench market portfolio into account. In the framework of a univariate Beta-model we consider a stable long-run CAPM taking account of the fat-tails of stock returns and the common stochastic trends between stock prices. Using the same data used by Fama and French (1996), the stable long-run CAPM demonstrates that Markowitz rule of the expected returns and variance of returns can (still) -without any use of firm specific variables- explain the variation of the cross-sectional average returns. -- Das Capital-Asset-Pricing-Modell (CAPM) ist einer der populärsten empirischen Ansätze zur Analyse der Finanzmarktdaten. In der Literatur jedoch sind eher Gegenbeweise über seine empirische Tauglichkeit akkumuliert. Fama und French (1996) haben beispielsweise aufgrund ihrer empirischen Untersuchungsergebnisse über die Beziehung zwischen dem Markt-Beta und der Durchschnittsrendite schlussgefolgert, daß das CAPM keine nützliche Methode für empirische Finanzmarktanalyse mehr sein kann. Die meisten Arbeiten aber, die sich mit dem CAPM beschäftigen, berücksichtigen weder die ausreißerreiche empirische Renditenverteilung noch die Preisbeziehung zwischen dem einzelnen Kurs und dem Benchmark. In der vorliegenden Arbeit wird im Rahmen univariater Beta-Modelle ein Versuch zur Spezifikation eines stabilen langfristigen CAPM gemacht, das sowohl die ausreißerreiche empirische Renditenverteilung als auch die Preisbeziehung zwischen dem einzelnen Kurs und dem Benchmark berücksichtigt. Mit dem Datensatz von Fama und French (1996) wird gezeigt, daß das stabile langfristige CAPM in der Lage ist, anhand der Markowitz?schen Mittelwert-Varianz-Regel ?ohne Hinzufügen firmspezifischer Variablen? die Variabilität durchschnittlicher Rendite in Querschnittsdaten zu erklären.CAPM,Stable Paretian distribution,Sto chastic common trend

Financial Market Analysis Can Go Mad (in the search for irrational behaviour during the South Sea Bubble)

An investigation into the legal and political history of South Sea Company subscription finance shows that the subscription contracts had default options built into them, as was typically the case in eighteenth-century subscription financing. Company records and contemporary pamphlet literature show that people understood the subscription finance mechanics that were stated in law. A fair presentation of South Sea share value data also supports this view. We thus conclude that the analyses published in this Review by Dale, Johnson and Tang were irretrievably flawed and present a substantially incorrect history of the markets for South Sea shares.South Sea Company, Royal African Company, Financial Revolution, Bubble Act, subscription shares, options markets.

High Dimensional Event Exploration Over Multiple Simulations

In this project, we introduce a visualization technique to analyze event simulation data. In particular, we allow the user to discover families of events based on the topological evolution of discrete events across simulations. Discovering how events behave across runs of a simulation has applications in financial market analysis, military simulations, physical mechanics, and other settings. Our approach is to use established methods to produce a linearized tour through parameter space of arbitrary dimension and visualize events of interest in two dimensions, where the first dimension is the tour ordering and the second dimension is usually time. This paper presents our approach and gives examples in the context of a magnet dynamics simulation