Investment Strategies Used as Spectroscopy of Financial Markets Reveal New Stylized Facts
Open Access
- 14 September 2011
- journal article
- research article
- Published by Public Library of Science (PLoS) in PLOS ONE
- Vol. 6 (9), e24391
- https://doi.org/10.1371/journal.pone.0024391
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.Other Versions
This publication has 42 references indexed in Scilit:
- Ecology and economicsNature, 2011
- False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated AlphasThe Journal of Finance, 2010
- Which past returns affect trading volume?Journal of Financial Markets, 2009
- Complex Evolutionary Systems in Behavioral FinanceSSRN Electronic Journal, 2008
- Can mutual fund "stars" really pick stocks? New evidence from a bootstrap analysisThe Journal of Finance, 2006
- The Predictive Power of Zero Intelligence in Financial MarketsSSRN Electronic Journal, 2004
- Market force, ecology and evolutionIndustrial and Corporate Change, 2002
- Learning to Be OverconfidentThe Review of Financial Studies, 2001
- Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual InvestorsThe Journal of Finance, 2000
- An Empirical Analysis of the Limit Order Book and the Order Flow in the Paris BourseThe Journal of Finance, 1995