Estimating the algorithmic complexity of stock markets
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Publication:4586433
DOI10.3233/AF-150052zbMATH Open1396.91820arXiv1504.04296OpenAlexW3122854106MaRDI QIDQ4586433FDOQ4586433
Authors: Olivier Brandouy, Lin Ma, Jean-Paul Delahaye 
Publication date: 13 September 2018
Published in: Algorithmic Finance (Search for Journal in Brave)
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.
Full work available at URL: https://arxiv.org/abs/1504.04296
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Analysis of algorithms and problem complexity (68Q25) Actuarial science and mathematical finance (91G99)
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