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Market Fraction Hypothesis: A proposed test

Kampouridis, Michael, Chen, S.-H., Tsang, E. (2012) Market Fraction Hypothesis: A proposed test. International Review of Financial Analysis, 23 . pp. 41-54. ISSN 1057-5219. (doi:10.1016/j.irfa.2011.06.009) (The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided) (KAR id:42185)

The full text of this publication is not currently available from this repository. You may be able to access a copy if URLs are provided.
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This paper presents and formalizes the Market Fraction Hypothesis (MFH), and also tests it under empirical datasets. The MFH states that the fraction of the different types of trading strategies that exist in a financial market changes (swings) over time. However, while such swinging has been observed in several agent-based financial models, a common assumption of these models is that the trading strategy types are static and pre-specified. In addition, although the above swinging observation has been made in the past, it has never been formalized into a concrete hypothesis. In this paper, we formalize the MFH by presenting its main constituents. Formalizing the MFH is very important, since it has not happened before and because it allows us to formulate tests that examine the plausibility of this hypothesis. Testing the hypothesis is also important, because it can give us valuable information about the dynamics of the market''s microstructure. Our testing methodology follows a novel approach, where the trading strategies are neither static, nor pre-specified, as in the case in the traditional agent-based financial model literature. In order to do this, we use a new agent-based financial model which employs genetic programming as a rule-inference engine, and self-organizing maps as a clustering machine. We then run tests under 10 international markets and find that some parts of the hypothesis are not well-supported by the data. In fact, we find that while the swinging feature can be observed, it only happens among a few strategy types. Thus, even if many strategy types exist in a market, only a few of them can attract a high number of traders for long periods of time.

Item Type: Article
DOI/Identification number: 10.1016/j.irfa.2011.06.009
Subjects: Q Science > Q Science (General) > Q335 Artificial intelligence
Divisions: Divisions > Division of Computing, Engineering and Mathematical Sciences > School of Computing
Depositing User: Michael Kampouridis
Date Deposited: 09 Aug 2014 10:56 UTC
Last Modified: 16 Nov 2021 10:16 UTC
Resource URI: (The current URI for this page, for reference purposes)
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