Fractal Markets Hypothesis and the Global Financial Crisis: Scaling, Investment Horizons and Liquidity

We investigate whether fractal markets hypothesis and its focus on liquidity and investment horizons give reasonable predictions about dynamics of the financial markets during the turbulences such as the Global Financial Crisis of late 2000s. Compared to the mainstream efficient markets hypothesis, fractal markets hypothesis considers financial markets as complex systems consisting of many heterogenous agents, which are distinguishable mainly with respect to their investment horizon. In the paper, several novel measures of trading activity at different investment horizons are introduced through scaling of variance of the underlying processes. On the three most liquid US indices – DJI, NASDAQ and S&P500 – we show that predictions of fractal markets hypothesis actually fit the observed behavior quite well.