Memory effects in stock price dynamics: evidences of technical trading
The likelihood of stock prices bouncing on specific values increases due to memory effects in the time series data of the price dynamics.
Scientific Reports 4, 4487 (2014)
F. Garzarelli, M. Cristelli, G. Pompa, A. Zaccaria, L. Pietronero
















Technical trading represents a class of investment strategies for Financial Markets based on the analysis of trends and recurrent patterns in price time series. According standard economical theories these strategies should not be used because they cannot be profitable. On the contrary, it is well-known that technical traders exist and operate on different time scales. In this paper we investigate if technical trading produces detectable signals in price time series and if some kind of memory effects are introduced in the price dynamics. In particular, we focus on a specific figure called supports and resistances. We first develop a criterion to detect the potential values of supports and resistances. Then we show that memory effects in the price dynamics are associated to these selected values. In fact we show that prices more likely re-bounce than cross these values. Such an effect is a quantitative evidence of the so-called self-fulfilling prophecy, that is the self-reinforcement of agents’ belief and sentiment about future stock prices’ behavior.
More in Reconstructing credit networks
Physics of financial networks
Statistical physics contributes to new models and metrics for the study of financial network structure, dynamics, stability and instability.
Network valuation in finance
Consistent valuation of interbank claims within an interconnected financial system can be found with a recursive update of banks' equities.
Reconstructing credit
New mathematical tools can help infer financial networks from partial data to understand the propagation of distress through the network.
Complex derivatives
Network-based metrics to assess systemic risk and the importance of financial institutions can help tame the financial derivatives market.
Networks of credit default swaps
Time series data from networks of credit default swaps display no early warnings of financial crises without additional macroeconomic indicators.
Financial network reconstruction
Statistical mechanics concepts reconstruct connections between financial institutions and the stock market, despite limited data disclosure.
Pathways towards instability
Processes believed to stabilize financial markets can drive them towards instability by creating cyclical structures that amplify distress.