Tuesday, March 16, 2010

A taste of the APS March Meeting: finance's fractal nature



Portland, Oregon. Not pictured: amazing physics breakthroughs.

At any time of year, Portland's charms—its scenic bridges, lush parks, microbreweries and the incomparable Powell's bookstore—would tempt me to visit. But I've never longed to be in that city as much as I do right now. The American Physical Society's March Meeting is in full swing, and I'm missing out on the hottest breakthroughs in condensed matter physics (the field that gave us the semiconductor, people!) and other strange and fascinating areas. I went to the April Meeting (held, counterintuitively, in February), and it was like a Vegas buffet—too much to choose from and not enough room (in this case mental) for all of the delicious physicsy goodness being offered. And if April is like a Vegas buffet, well, then March is like a Vegas buffet with extra sushi. Hopefully we'll get some nice tidbits in the coming days from our other bloggers, but they've already served a favorite dish of mine, so bear with me while I salivate from afar, as it were.

You may not expect to hear about the stock market at a physics conference, but don't underestimate what physicists are thinking about. H. Eugene Stanley calls himself an econophysicist—he coined the term—and appears to have a physicists' firm belief in not fooling ourselves when it comes to what we know, in this case, about economics. At a session titled, quite wonderfully, "Four Horsemen of the Apocalypse Redux: The Physics of Global Catastrophes and Global Countermeasures," Stanley presented work that I'm tempted to call "microeconomics," although that wouldn't be quite right. Instead of looking at grand, sweeping economic trends, he wanted to see what was going on at a scale that financiers usually ignore.


Big, jarring events in the stock market aren't outliers--they're just the same as the tiny tremors seen every second.

If you think our economy is too tumultuous to bear thinking about, try looking at the bubbling frenzy of stock prices and volumes microsecond to microsecond. Stanley analyzed 14 million German Stock Exchange trades, logged to the nearest microsecond, over a 9 month period, and he saw that trading sped up and increased in volume following periods of extreme spikiness, while lulls had a knock on effect on trading, slowing it down and decreasing the volume of trades. Disturbingly, he saw that the stock market has something of a fractal nature; surges and falls seemed to work this way, whether they're on the scale of a few seconds or months. So the booms and busts that take us by surprise really shouldn't at all. "The statistical properties of these 'outliers' are identical to the statistical properties of everyday fluctuations," he writes in his abstract. If the microscale financial world is a bubbling cauldron, we should expect to see the same dynamics when we zoom out to more practical length scales.

Stanley isn't your average economist by a long shot, but he's doing something extremely exciting: applying the bread-and-butter data-mining techniques of physics to a world that's pretty much only been thought about in the abstract. A glance at the list of papers he has on the physics preprint arXiv and you'll see everything from public debt to corruption, heady stuff for the director of a "polymer studies" center. As someone who's turned a career in physics to new subjects, he's almost the opposite of a very public economist. A recent profile of Paul Krugman asked whether the Nobel Prize-winning economist had anywhere else to go in his career. It also mentioned how Krugman berated fellow economists in a New York Times column last fall for failing to see the current crisis coming. I wonder whether he would find Stanley's approach to be an viable avenue for pushing economics to new levels of rigor and predictive power. Krugman's not likely to do much in academia anymore; profile even quotes him saying, somewhat facetiously, "If I do have some brilliant academic insight, what are they going to do, give me a Nobel Prize?" Maybe not in the same field, but why not?

5 comments:

  1. This is called Elliott Wave and it's been around since the 1930s.

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  2. I recently came across your post and have been reading along. I thought I would leave my first comment. I don't know what to say except that it caught my interest and you've provided informative points. I will visit this blog often.

    Thank you,



    http://www.ezbusinessloans.com

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  3. Read a lot about the elliot wave theory a few years ago.
    Never really applied it to my trading though

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  4. That is fascinating, in technical analysis we also see that the stock markets moves in waves "Elliott Waves" and also in cycles, the clearest to discern are the Business Cycles, and the Kuznets Cycles, there are even seasonal cycles. This article I think adds to the current studies in technical analysis. Where can we get more details about this research.

    thanks

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  5. "So the booms and busts that take us by surprise really shouldn't at all." This statement is the cornerstone of the article and very true. Study of the market is essential and most technical analysis and chart junkies would agree that we shouldn't be taken by surprise.

    ReplyDelete