Information-theoretic approach to lead-lag effect on financial markets

An algorithmic information-theoretic approach to the behaviour of financial markets

Using frequency distributions of daily closing price time series of several financial market indices, we investigate whether the bias away from an equiprobable sequence distribution found in the data, predicted by algorithmic information theory, may account for some of the deviation of financial markets from log-normal, and if so for how much of said deviation and over what sequence lengths. We...

Perturbative Approach on Financial Markets

We study the point of transition between complete and incomplete financial models thanks to Dirichlet Forms methods. We apply recent techniques, developped by Bouleau, to hedging procedures in order to perturbate parameters and stochastic processes, in the case of a volatility parameter fixed but uncertain for traders; we call this model Perturbed Black Scholes (PBS) Model. We show that this mo...

An Alternative Approach To Investigating Lead-lag Relationships Between Stock And Stock Index Futures Markets

In the absence of market frictions, the cost of carry model of stock index futures pricing predicts that returns on the underlying stock index and the associated stock index futures contract will be perfectly contemporaneously correlated. Evidence suggests, however, that this prediction is violated with clear evidence that the stock index futures market leads the stock market. We argue that tra...

Markets for Financial Information

Testing Lead-Lag Effects under Game-Theoretic Efficient Market Hypotheses

A game-theoretic efficient market hypothesis says that a trading strategy will not multiply the capital it risks substantially relative to a specified market index. This implies that the autocorrelation of returns with respect to the index will be small and that a signal x will have approximately the same lead-lag effect on all traded securities. These predictions do not depend on assumptions a...