Time Scales and Characteristics of Stock Markets in Different Investment Horizons

Abstract

Investors adopt varied investment strategies depending on the time scales (τ) of short-term and long-term investment time horizons (ITH). The nature of the market is very different in various investment τ. Empirical mode decomposition (EMD) based Hurst exponents (H) and normalized variance (NV) techniques have been applied to identify the τ and characteristics of the market in different time horizons. The values of H and NV have been estimated for the decomposed intrinsic mode functions (IMF) of the stock price. We obtained (Formula presented.) and (Formula presented.) for the IMFs with τ ranging from a few days to 3 months and (Formula presented.) 5 months, respectively. Based on the value of (Formula presented.), two time series have been reconstructed from the (Formula presented.) : a) short-term time series [(Formula presented.)] with (Formula presented.) and τ from a few days to 3 months; b) long-term time series (Formula presented.) with (Formula presented.) and (Formula presented.) 5 months. The (Formula presented.) and (Formula presented.) show that market dynamics is random in short-term (Formula presented.) and correlated in long-term (Formula presented.). We have also found that the (Formula presented.) is very small in the short-term ITH and gradually increases for long-term (Formula presented.). The results further show that the stock prices are correlated with the fundamental variables of the company in the long-term (Formula presented.). The finding may help the investors to design investment and trading strategies in both short-term and long-term investment horizons.