Stochastic Flow Diagrams Add Topology to the Econometric Toolkit

45 Pages Posted: 20 Jan 2014 Last revised: 5 Jul 2015

See all articles by Marcos Lopez de Prado

Marcos Lopez de Prado

Cornell University - Operations Research & Industrial Engineering; AQR Capital Management, LLC

Date Written: January 26, 2014

Abstract

Just as Geometry could not help Euler solve the “Seven Bridges of Königsberg” problem, Econometric analysis or Linear Algebra alone are not able to answer many key questions about how financial markets coordinate. Statistical tables are detailed in terms of reporting estimated values, however that level of detail also obfuscates the logical and hierarchical relationships between variables.

Stochastic Flow Diagrams (SFDs) are more insightful than the standard collection of statistical tables because SFDs shift the focus from the algebraic solution of the system to its logical structure. SFDs open the possibility to apply Topology and Graph Theory results to the study of Economic and Financial systems.

Keywords: Time Series, Graph Theory, Topology, Financial Flows, Macro Trading

JEL Classification: G0, G1, G2, G15, G24, E44

Suggested Citation

López de Prado, Marcos, Stochastic Flow Diagrams Add Topology to the Econometric Toolkit (January 26, 2014). Available at SSRN: https://ssrn.com/abstract=2381301 or http://dx.doi.org/10.2139/ssrn.2381301

Marcos López de Prado (Contact Author)

Cornell University - Operations Research & Industrial Engineering ( email )

237 Rhodes Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.orie.cornell.edu

AQR Capital Management, LLC

One Greenwich Plaza
Greenwich, CT 06830
United States

HOME PAGE: http://www.aqr.com

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