Estimating the algorithmic complexity of stock markets

DOI10.3233/AF-150052MaRDI QIDQ4586433zbMATH OpenOpenAlexFDO

Authors Olivier Brandouy, Lin Ma, Jean-Paul Delahaye

Publication date 13 September 2018

Published in Algorithmic Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/1504.04296

zbMATH Keywords

efficiencyreturncompressionKolmogorov complexity

Mathematics Subject Classification ID

Analysis of algorithms and problem complexity (68Q25) Actuarial science and mathematical finance (91G99)

Abstract: Randomness and regularities in Finance are usually treated in probabilistic terms. In this paper, we develop a completely different approach in using a non-probabilistic framework based on the algorithmic information theory initially developed by Kolmogorov (1965). We present some elements of this theory and show why it is particularly relevant to Finance, and potentially to other sub-fields of Economics as well. We develop a generic method to estimate the Kolmogorov complexity of numeric series. This approach is based on an iterative "regularity erasing procedure" implemented to use lossless compression algorithms on financial data. Examples are provided with both simulated and real-world financial time series. The contributions of this article are twofold. The first one is methodological : we show that some structural regularities, invisible with classical statistical tests, can be detected by this algorithmic method. The second one consists in illustrations on the daily Dow-Jones Index suggesting that beyond several well-known regularities, hidden structure may in this index remain to be identified.

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(6)

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• Measuring the efficiency of the intraday Forex market with a universal data compression algorithm
• An algorithmic look at financial volatility
• Algorithmic complexity of real financial markets
• An improvement of the present complexity theory and its application to the stock exchange market

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