21

Stylistic Properties
of Equity Markets
We will briefly describe some facets of the markets, often called stylized empiri
cal
facts. The explanatory hypotheses of what we believe causes these stylistic prope
rties
are left for another day.
A volatility turbulent day is usually followed by a second volatility turbulent
day. Not quite symmetrically a tranquil session is often followed by one or more
tranquil sessions.
Volatility is usually higher following a down market day. High volatility events
tend to cluster in moderate (days) timescales.
Among a number of other theories it is thought that volatility switches up or
down between a small number (2 or perhaps 3) distinct states or regimes. The
regime model proposes that volatility switches between high and low states but
gives us no hint as to how long it stays in each state or what conditions create
the
regime switch. This phenomenon is usually combined with volatility clustering.
Generally, over a test sample of 100 selected stocks the high frequency (at inte
rvals
of one minute or less) returns are not Gaussian, that is, not normally distribut
ed but
Gaussianity seems to reappear as we increase the timescale over which the return
s
are calculated.
The distribution of returns has monotonically increasingly fat tails as the samp
ling
frequency is increased. We have found that this feature also varies in magnitude
among individual stocks.
There is a varying amount of autocorrelation of returns from stock to stock whic
h
also seems to be specific to individual stocks. The autocorrelation effect seems
to wane then disappear after 180 to 300 seconds. When the microstructure of the
market is not engaged autocorrelation of returns is insignificant at sampling ra
tes over
600 seconds.94
The Leshik-Cralle Trading Methods
This autocorrelation at high frequency sampling is an important part of designing our ALPHA algorithmic strategies as most of our triggering activity relies o
n
autocorrelation as part of the pattern recognition process.
Various scaling laws can be used to describe absolute and mean squared returns
as functions of their time intervals. It would appear that there is a proportion
ality
relating to a power law of the sampling frequency.
There is some considerable asymmetry in the movement of prices with the drawdowns being significantly larger and faster than the upward movements.
There is considerable variation of price trajectory smoothness both as stock-spe
cific
features and also as variations in the performance of individual stocks over tim
e in
relation to the market as a whole.
We have found a certain amount of predictive power in the bellwether stocks of a
sector. It appears that traders take a finite amount of time to take in the move
ment of
these stocks and only then decide to look at the related stocks in the sector.
This may also be a feature of the information diffusion process. We might be
tempted to assign some form of time constant to it but so far we have too much
variability in the data pointing to there being another variable (undefined so f

ar)
hiding in the mix. There may also be more than one major variable that influence
s
things which we have not yet been able to track down.
Professor Vandewalle has shown some interesting topological relationships between stocks and how their returns are correlated. We have extended and applied
some of these concepts to one of our algos (General Pawn). The related website
www.market-topology.com shows much work on correlation of stocks and has some
very good topological displays of stock relationships.
We observe decreasing kurtosis (which is the height of the normal distribution:
the tall ones are called leptokurtic, and the flat ones are called platykurtic)
in return
distributions as the sampling frequency is decreased and the interval between th
e
sample points is increased. At intervals of over five trading sessions we found
the
kurtosis approaching the Gaussian values around three, whereas at high frequency
intervals (60 seconds or less) the distribution was distinctly leptokurtic.
The Law of Large Numbers: as more than 30 or so samples are taken from a non
Gaussian distribution the distribution of the samples is Gaussian! Go figure . .
.
Let us have a look at how the size of returns relates to the frequency at which
we
measure it. Please see the RETURNS file on the CD for details, some of which are
shown in Figures 21.1 to 21.3, below.
The data column was selected at random from our tick database and contains 5714
rows, which we shall use rounded down to 5000.