The (Mis)Behaviour Of The Markets

All credit to www.automated-trading-system.com/misbehaviour-markets-mandelbrot/

A review by someone I like about a book that I love.

Two of the main concepts:

The first one is fractal scaling, basically based on the fact that market price changes do not follow a Gaussian distribution but instead a power-law distribution, in which the tails drop off much slower than in the usually assumed bell curve (ie. fat tails), giving infinite variance and explaining why extreme price movements are much more frequent than anticipated by the “classic” models.

The second main concept is that of long memory or long-range dependence, characterized by the Hurst exponent H. Presenting some studies in the Nile river hydrology, Mandelbrot establishes the concept of trend persistence in natural phenomenon: periods of floods or droughts tend to come in streaks: they exhibit more serial correlation and for longer than one would expect.

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