Fractal Market Hypothesis and Markov Regime Switching Model: A Possible Synthesis and Integration

International Journal of Economics and Financial Issues, 2018, 8(1), 93-100

8 Pages Posted: 8 Feb 2018

See all articles by Mischelle Doorasamy

Mischelle Doorasamy

University of KwaZulu-Natal - Faculty of Commerce & Management (Westville Campus)

Prince Sarpong

Centre for Financial Planning Studies

Date Written: January 28, 2018

Abstract

Peters (1994) proposed the fractal market hypothesis (FMH) as an alternative to the efficient market hypothesis (EMH), following his criticism of the EMH. In this study, we analyse whether the fractal nature of a financial market determines its riskiness and degree of persistence as measured by its Hurst exponent. To do so, we utilize the Markov Switching Model to derive a persistence index (PI) to measure the level of persistence of selected indices on the Johannesburg stock exchange (JSE) and four other international stock markets. We conclude that markets with high Hurst exponents, show stronger persistence and less risk relative to markets with lower Hurst exponents.

Keywords: Fractal Market Hypothesis, Markov Switching Model, Efficient Market Hypothesis

JEL Classification: G150, G140

Suggested Citation

Doorasamy, Mischelle and Sarpong, Prince, Fractal Market Hypothesis and Markov Regime Switching Model: A Possible Synthesis and Integration (January 28, 2018). International Journal of Economics and Financial Issues, 2018, 8(1), 93-100. Available at SSRN: https://ssrn.com/abstract=3111614

Mischelle Doorasamy

University of KwaZulu-Natal - Faculty of Commerce & Management (Westville Campus) ( email )

Durban 4000
South Africa

Prince Sarpong (Contact Author)

Centre for Financial Planning Studies ( email )

14 Trill Road
Cape Town, western Cape 7925
South Africa
613545745 (Phone)

HOME PAGE: http://www.cfps.co.za

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