Price Clustering and Discreteness: Is There Chaos Behind the Noise?
University of Durham Economics and Finance Working Paper
20 Pages Posted: 26 Jul 2004
Date Written: July 19, 2004
We investigate the compass rose (Crack, T.F. and Ledoit, O. (1996), Journal of Finance, 51(2), pg. 751-762) patterns revealed in phase portraits (delay plots) of stock returns. The structures observed in these diagrams have been attributed mainly to price clustering and discreteness. Using wavelet based denoising, we examine the noise-free versions of a set of FTSE100 stock returns time series. We reveal evidence of non-periodic cyclical dynamics. As a second stage, we apply Surrogate Data Analysis on the original and denoised stock returns. Our results suggest that there is a strong nonlinear and possibly deterministic signature in the data generating processes of the stock returns sequences.
Keywords: Price discreteness, microstructure, wavelets, noise reduction, complexity, nonlinearity, surrogate data analysis, chaotic dynamics
JEL Classification: G10, G12, G22
Suggested Citation: Suggested Citation