Stock Market Distribution

Well a year late it seems I have my answer. I've already shown that a log/log graph of FTSE day changes is mostly linear. This indicates a scale invariant power law distribution!

Such distributions exist where the more you have the more you get. It implies, as suspected, that the size of a days change is liable to snow ball. Large losses encouraging more and more people to become bearish. Likewise large gains encouraging more and more people to become bullish.

This supports the "speculative" side of the market: that people trade not for long term fundamentals but try to trade in the short term and take advantage, or protect themselves, from current trends.

The question then is the distribution of bear/bull thresholds in the average human population. By which I mean if the number of people turning bearish increases with the size of the down turn there must be a distribution of thresholds beyond which people decide to sell. If there was just one threshold at say 1% then were the market ever to turn below 1% then everyone would sell. This doesn't happen.

Obviously the down turn is different from different people. People buying on that day will see a 1% drop. People who were perhaps 100% up will fall to 98% on a 1% drop. People who bought in after the 1% drop would only see a 1% drop where the market drop further to 2% down. There is a distribution of people going into the market, coming out and the existence of thresholds will need to be wrestled from them.

2Do!