O'Reilly logo

Stay ahead with the world's most comprehensive technology and business learning platform.

With Safari, you learn the way you learn best. Get unlimited access to videos, live online training, learning paths, books, tutorials, and more.

Start Free Trial

No credit card required

The Misbehavior of Markets: A Fractal View of Risk, Ruin, and Reward

Book Description

Mathematical superstar and inventor of fractal geometry, Benoit Mandelbrot, has spent the past forty years studying the underlying mathematics of space and natural patterns. What many of his followers don't realize is that he has also been watching patterns of market change. In The (Mis)Behavior of Markets, Mandelbrot joins with science journalist and former Wall Street Journal editor Richard L. Hudson to reveal what a fractal view of the world of finance looks like. The result is a revolutionary reevaluation of the standard tools and models of modern financial theory. Markets, we learn, are far riskier than we have wanted to believe. From the gyrations of IBM's stock price and the Dow, to cotton trading, and the dollar-Euro exchange rate--Mandelbrot shows that the world of finance can be understood in more accurate, and volatile, terms than the tired theories of yesteryear.The ability to simplify the complex has made Mandelbrot one of the century's most influential mathematicians. With The (Mis)Behavior of Markets, he puts the tools of higher mathematics into the hands of every person involved with markets, from financial analysts to economists to 401(k) holders. Markets will never be seen as "safe bets" again.

Table of Contents

  2. Title Page
  4. Dedication
  5. Acknowledgements
  7. PART ONE - The Old Way
    1. CHAPTER I - Risk, Ruin, and Reward
      1. The Study of Risk
      2. The Power of Power Laws
      3. A Game of Chance
    2. CHAPTER II - By the Toss of a Coin or the Flight of an Arrow?
      1. Chance in Finance
      2. Chance, Simple or Complex
      3. The “Mild” Form of Chance
      4. The Blindfolded Archer’s Score
      5. Back to Finance
    3. CHAPTER III - Bachelier and His Legacy
      1. “Not an Eagle”
      2. The Coin-Tossing View of Finance
      3. The Efficient Market
    4. CHAPTER IV - The House of Modern Finance
      1. Markowitz: What Is Risk?
      2. Sharpe: What Is an Asset Worth?
      3. Black-Scholes: What Is Risk Worth?
      4. Spreading the Word on Wall Street
    5. CHAPTER V - The Case Against the Modern Theory of Finance
      1. Shaky Assumptions
    6. Pictorial Essay: Images of the Abnormal
      1. The Evidence
      2. But Does It Work?
      3. The Persistence of Error
  8. PART TWO - The New Way
    1. CHAPTER VI - Turbulent Markets: A Preview
      1. Turbulent Trading
      2. Looney ’Toons for Brown-Bachelier
      3. Preview of More Close-Fitting Cartoons
    2. CHAPTER VII - Studies in Roughness: A Fractal Primer
      1. The Rules of Roughness
      2. A Dimension to Measure Roughness
    3. Pictorial Essay: A Fractal Gallery
    4. CHAPTER VIII - The Mystery of Cotton
      1. Clue No. 1: A Power Law Out of the Blue
      2. Clue No. 2: Early Power Laws in Economics
      3. Clue No. 3: The Laws of Exceptional Chance
      4. The Cotton Case: Basically Closed
      5. The Dénouement
      6. The Meaning of Cotton
      7. Coda: Looney ’Toons, Reprised for Long Tails
    5. CHAPTER IX - Long Memory, from the Nile to the Marketplace
      1. Abu Nil
      2. Father Time
      3. A Random Run
      4. The Selling of H
      5. Coda: Looney ’Toons of Long Dependence
    6. CHAPTER X - Noah, Joseph, and Market Bubbles
      1. An Alien Plays the Market
      2. Two Dual Forms of Wild Variability
      3. A Good Reason for “Bubbles”
    7. CHAPTER XI - The Multifractal Nature of Trading Time
      1. Looney ’Toons for the Last Time
      2. Multifractal Time
      3. Beyond Cartoons: The Multifractal Model with No Grids
      4. Putting the Model to Work
  9. PART THREE - The Way Ahead
    1. CHAPTER XII - Ten Heresies of Finance
      1. 1. Markets Are Turbulent.
      2. 2. Markets Are Very, Very Risky—More Risky Than the Standard Theories Imagine.
      3. 3. Market “Timing” Matters Greatly. Big Gains and Losses Concentrate into Small ...
      4. 4. Prices Often Leap, Not Glide. That Adds to the Risk.
      5. 5. In Markets, Time Is Flexible.
      6. 6. Markets in All Places and Ages Work Alike.
      7. 7. Markets Are Inherently Uncertain, and Bubbles Are Inevitable.
      8. 8. Markets Are Deceptive.
      9. 9. Forecasting Prices May Be Perilous, but You Can Estimate the Odds of Future Volatility.
      10. 10. In Financial Markets, the Idea of “Value” Has Limited Value.
    2. CHAPTER XIII - In the Lab
      1. Problem 1: Analyzing Investments
      2. Problem 2: Building Portfolios
      3. Problem 3: Valuing Options
      4. Problem 4: Managing Risk
      5. Aux Armes!
  10. Notes
  11. Bibliography
  12. Index
  13. Copyright Page