Analysis of Financial Article Essay Example | Topics and Well Written Essays - 1000 words

Analysis of Financial Article - Essay Example The author believes that in all cases, fractal structures and non-periodic cycles were found, which accordingly suggests and provides evidence that capital markets have a non-linear system, which thus makes the EMH doubtful. The author begins the article by asserting that logarithms will be applied to analyze data instead of percentages as logarithms can calculate cumulative returns and percentages cannot. Thus, the steps to analyzing R/S for capital markets include first converting prices into logarithms and then applying the suggested equations. Then each capital market instrument and data is analyzed turn by turn to gauge volatility, cycles, and price changes. The author uses Hurst statistics to analyze various capital market instruments and implies at the end of the article that prices are reflections of investors’ concept of ‘fair value†. While some may believe this to be a single value, this can actually be a range of values which is based on information such as the earnings from an investment, the management system, the new products offered, and the economic environment in that area. After fundamental analysis and technical analysis of what other investors believe their counterparts are willing to pay, the price is automatically adjusted to what is perceived as fair price and thus other investors become attracted to the investment and begin to purchase it. A Hurst statistic of more than 0.5 suggests that new information and previous events may affect the future prices of securities while one, which is lower than 0.5 implies the opposite. The author claims that the capital markets have a fractal nature and thus models such as the CAPM, APT, and Black-Scholes model fail. It is mainly due to their simple assumptions and their lack of acknowledging the importance of time when making vital decisions. Hence, the author believes that fractal analysis is a better measure of the reality of capital markets and the outcomes of human decision maki ng. Fractal analysis is a reflection of the reality of life and how messy and complicated results can be. Thus, while it makes mathematics more difficult, it also explains the qualitative aspects of decision making and capital markets. It also gives capital markets a number of air values, cycles, trends, and recognizes the fact that there are innumerous possibilities. Thus, in the author’s point of view, fractal analysis is a better measure of the capital markets rather than the simple models as it accounts for a number of things, which are not accounted for in simple analysis. Hence, even though it is more complicated, the author encourages its use. The important points in the article are as follows: Logarithm returns are a better measure than percentages when calculating changes in price The author suggests that enough data is collected when the natural period of the system is visible and several cycles are available for analysis The first regression analysis is applied to the S&P 500 from 1950 to July 1958 The high value of H suggests the fractal position of the market The stock market results are not in accordance with the efficient market hypothesis The author suggests that market returns are persistent and have a fractal probability distribution The system is non-periodic and reinforces trends According to CAPM, a higher beta stock value is riskier than a lower beta stock value This is due to higher volatility The author suggests that high H values pose less risk and low H values may pose more risk High H values have less noise in the data while lower H values have more noise High H values may change abruptly Portfolio diversification reduces risk Market efficiency can be determined by the level of noise in the