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Investment Strategies Used as Spectroscopy of Financial Markets Reveal New Stylized Facts (Investment Strategies Reveal New Stylized Facts)

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 f... Full description

Journal Title: PLoS ONE 2011, Vol.6(9), p.e24391
Main Author: Zhou, Wei-Xing
Other Authors: Mu, Guo-Hua , Chen, Wei , Sornette, Didier
Format: Electronic Article Electronic Article
Language: English
Subjects:
ID: E-ISSN: 1932-6203 ; DOI: 10.1371/journal.pone.0024391
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recordid: plos10.1371/journal.pone.0024391
title: Investment Strategies Used as Spectroscopy of Financial Markets Reveal New Stylized Facts (Investment Strategies Reveal New Stylized Facts)
format: Article
creator:
  • Zhou, Wei-Xing
  • Mu, Guo-Hua
  • Chen, Wei
  • Sornette, Didier
subjects:
  • Research Article
  • Mathematics
  • Physics
  • Social And Behavioral Sciences
  • Physics
  • Mathematics
ispartof: PLoS ONE, 2011, Vol.6(9), p.e24391
description: 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.
language: eng
source:
identifier: E-ISSN: 1932-6203 ; DOI: 10.1371/journal.pone.0024391
fulltext: fulltext
issn:
  • 1932-6203
  • 19326203
url: Link


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titleInvestment Strategies Used as Spectroscopy of Financial Markets Reveal New Stylized Facts (Investment Strategies Reveal New Stylized Facts)
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subjectResearch Article ; Mathematics ; Physics ; Social And Behavioral Sciences ; Physics ; Mathematics
descriptionWe 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.
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abstractWe 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.
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doi10.1371/journal.pone.0024391
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date2011-09-14