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Different investment strategies are adopted in short-term and long-term depending on the time scales, even though time scales are adhoc in nature. Empirical mode decomposition based Hurst exponent analysis and variance technique have been applied to identify the time scales for short-term and long-term investment from the decomposed intrinsic mode functions(IMF). Hurst exponent ($H$) is around 0.5 for the IMFs with time scales from few days to 3 months, and $Hgeq0.75$ for the IMFs with the time scales $geq5$ months. Short term time series [$X_{ST}(t)$] with time scales from few days to 3 months and $H~0.5$ and long term time series [$X_{LT}(t)$] with time scales $geq5$ and $Hgeq0.75$, which represent the dynamics of the market, are constructed from the IMFs. The $X_{ST}(t)$ and $X_{LT}(t)$ show that the market is random in short-term and correlated in long term. The study also show that the $X_{LT}(t)$ is correlated with fundamentals of the company. The analysis will be useful for investors to design the investment and trading strategy.
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The paper presents the comparative study of the nature of stock markets in short-term and long-term time scales with and without structural break in the stock data. Structural break point has been identified by applying Zivot and Andrews structural trend break model to break the original time series (TSO) into time series before structural break (TSB) and time series after structural break (TSA). The empirical mode decomposition based Hurst exponent and variance techniques have been applied to the TSO, TSB and TSA to identify the time scales in short-term and long-term from the decomposed intrinsic mode functions. We found that for TSO, TSB and TSA the short-term time scales and long-term time scales are within the range of few days to 3 months and greater than 5 months respectively, which indicates that the short-term and long-term time scales are present in the stock market. The Hurst exponent is $sim 0.5$ and $geq 0.75$ for TSO, TSB and TSA in short-term and long-term respectively, which indicates that the market is random in short-term and strongly correlated in long-term. The identification of time scales at short-term and long-term investment horizon will be useful for investors to design investment and trading strategies.
We propose a novel method to quantify the clustering behavior in a complex time series and apply it to a high-frequency data of the financial markets. We find that regardless of used data sets, all data exhibits the volatility clustering properties, whereas those which filtered the volatility clustering effect by using the GARCH model reduce volatility clustering significantly. The result confirms that our method can measure the volatility clustering effect in financial market.
We use rank correlations as distance functions to establish the interconnectivity between stock returns, building weighted signed networks for the stocks of seven European countries, the US and Japan. We establish the theoretical relationship between the level of balance in a network and stock predictability, studying its evolution from 2005 to the third quarter of 2020. We find a clear balance-unbalance transition for six of the nine countries, following the August 2011 Black Monday in the US, when the Economic Policy Uncertainty index for this country reached its highest monthly level before the COVID-19 crisis. This sudden loss of balance is mainly caused by a reorganization of the market networks triggered by a group of low capitalization stocks belonging to the non-financial sector. After the transition, the stocks of companies in these groups become all negatively correlated between them and with most of the rest of the stocks in the market. The implied change in the network topology is directly related to a decrease in stocks predictability, a finding with novel important implications for asset allocation and portfolio hedging strategies.
Although the threshold network is one of the most used tools to characterize the underlying structure of a stock market, the identification of the optimal threshold to construct a reliable stock network remains challenging. In this paper, the concept of dynamic consistence between the threshold network and the stock market is proposed. The optimal threshold is estimated by maximizing the consistence function. The application of this procedure to stocks belonging to Standard & Pools 500 Index from January 2006 to December 2011 yields the threshold value 0.28. In analyzing topological characteristics of the generated network, three globally financial crises can be distinguished well from the evolutionary perspective.
By adopting Multifractal detrended fluctuation (MF-DFA) analysis methods, the multifractal nature is revealed in the high-frequency data of two typical indexes, the Shanghai Stock Exchange Composite 180 Index (SH180) and the Shenzhen Stock Exchange Composite Index (SZCI). The characteristics of the corresponding multifractal spectra are defined as a measurement of market volatility. It is found that there is a statistically significant relationship between the stock index returns and the spectral characteristics, which can be applied to forecast the future market return. The in-sample and out-of-sample tests on the return predictability of multifractal characteristics indicate the spectral width $Delta {alpha}$ is a significant and positive excess return predictor. Our results shed new lights on the application of multifractal nature in asset pricing.
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