Machines, Memory and the Markov Property in Stock Returns: Deus Ex Machina?
29 Pages Posted: 5 May 2017
Date Written: April 24, 2017
This study seeks to understand whether and to what extent High Frequency Trading (HFT) affects the probabilistic properties of the stock returns in five markets. More specifically, it focuses on the impact of HFT/machine trading on five major stock indices, DAX, Nikkei 225, S&P 500, Russell 2000, and TOPIX. The empirical analysis demonstrates that while the introduction of machine trading and/or HFT appears to make the return series more “predictable” by reducing their Multiscale Entropy, it does not affect the Markov property, which does not hold for the return series under study.
Keywords: Markov Property, Short Memory, High Frequency Trading, Entropy
JEL Classification: C14, D83, G15
Suggested Citation: Suggested Citation