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Quantitative Finance > Statistical Finance

Title: Modeling stock markets through the reconstruction of market processes

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.
Comments: 49 pages, dissertation
Subjects: Statistical Finance (q-fin.ST); Computational Finance (q-fin.CP)
Cite as: arXiv:1803.06653 [q-fin.ST]
  (or arXiv:1803.06653v1 [q-fin.ST] for this version)

Submission history

From: João Carmo [view email]
[v1] Sun, 18 Mar 2018 12:43:24 GMT (1246kb)