Power Law Scaling and 'Dragon-Kings' in Distributions of Intraday Financial Drawdowns

33 Pages Posted: 20 Jul 2014 Last revised: 7 Apr 2015

See all articles by Vladimir Filimonov

Vladimir Filimonov

Swiss Federal Institute of Technology Zurich (ETH Zurich)

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute

Date Written: July 18, 2014

Abstract

We investigate the distributions of e-drawdowns and e-drawups of the most liquid futures financial contracts of the world at time scales of 30 seconds. The e-drawdowns (resp. e-drawups) generalise the notion of runs of negative (resp. positive) returns so as to capture the risks to which investors are arguably the most concerned with. Similarly to the distribution of returns, we find that the distributions of e-drawdowns and e-drawups exhibit power law tails, albeit with exponents significantly larger than those for the return distributions. This paradoxical result can be attributed to (i) the existence of significant transient dependence between returns and (ii) the presence of large outliers (dragon-kings) characterizing the extreme tail of the drawdown/drawup distributions deviating from the power law. The study of the tail dependence between the sizes, speeds and durations of drawdown/drawup indicates a clear relationship between size and speed but none between size and duration. This implies that the most extreme drawdown/drawup tend to occur fast and are dominated by a few very large returns. We discuss both the endogenous and exogenous origins of these extreme events.

Keywords: Extreme events, drawdowns, power law distribution, tail dependence, Dragon-King events, financial markets, high-frequency data

JEL Classification: C02, C14, C46, G01

Suggested Citation

Filimonov, Vladimir and Sornette, Didier, Power Law Scaling and 'Dragon-Kings' in Distributions of Intraday Financial Drawdowns (July 18, 2014). Swiss Finance Institute Research Paper No. 14-48. Available at SSRN: https://ssrn.com/abstract=2468195 or http://dx.doi.org/10.2139/ssrn.2468195

Vladimir Filimonov

Swiss Federal Institute of Technology Zurich (ETH Zurich) ( email )

Scheuchzerstrasse 7, SEC F3
Zurich, CH-8092
Switzerland

Didier Sornette (Contact Author)

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
Switzerland
41446328917 (Phone)
41446321914 (Fax)

HOME PAGE: http://www.er.ethz.ch/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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