Chaos and Order in the Capital Markets: A New View of Cycles, Prices, and Market Volatility

by Edgar E. Peters

Book Overview

The latest developments in chaos theory - from an industry expert Chaos and Order in the Capital Markets was the first book to introduce and popularize chaos as it applies to finance. It has since... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 0471139386
• ISBN13: 9780471139386
• Release Date: August 1996
• Publisher: Wiley
• Length: 288 Pages
• Weight: 1.45 lbs.
• Dimensions: 1.1" x 6.7" x 8.8"

Customer Reviews

Investing in the markets? Read this.

Nutshell review - 10+ years after reading this book for the first time I still find the material fascinating. It offers an engaging tour through the worlds of random walks, fractals, chaos and nonlinear dynamic systems for the layman. The author's approach is primarily a conceptual discussion of the topics under review rather than taking a mathematical approach and so it will be accessible to most all readers. The real message to take away from this book is not whether the markets can be described using fractal geometry or whether the market is a chaotic, nonlinear system. Rather it is that if you are a believer in the efficient market hypothesis, the capital asset pricing model, and the random walk models of market behaviour then you might be in for a nasty surprise. Other very interesting books in this vein are The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb, and The (MIS)Behaviour of Markets: A Fractal View of Risk, Ruin, and Reward by Benoit B. Mandelbrot.

A very good introduction

I read this book, the 1991 version, years ago. Around 1980 my own attempts to crack share prices statistically convinced me that all share prices behaved like a Gaussian random walk meaning that all speculation was comparable with playing roulette and I am not one of those guys who usually wins when gambling. This view was strengthened when the option pricing model came up, meaning that even the real pro's in the field assume that share prices are nothing but a random walk. This book has opened my eyes to the fact that there is much more to randomness than just the Gaussian curve. Share prices are not fully random. Impressive is the demonstration that an RS analysis on the real data is different when applying the same RS analysis on scrambled data. So there is information hidden in these time series, somewhere. Since then I have picked up the subject of cracking time series again with great pleasure. I think this book is exceptionally well written and without it I doubt if I would have been able to follow Mandelbrot's book "scaling and fractals in finance" that I bought later. The book is about understanding a subject, not about learning a simple formula to apply on a time series.

Good overview, bad balance

If you're looking for a purely conceptual introduction to how chaos theory can be applied to financial markets, this book is as good a source as any. Peters's discussion of R/S statistics and the graphical examples drawn from the markets are clear and intuitive (Ch. 7-8). The key point demonstrating long-term memory effects in the market is well made.However he spends an inordinate amount of time attacking the foundations of the efficient market hypothesis (EMH) to the point of being boring, yet the argument boils down to "it has errors when compared to reality". Duh, so does every other theory, including fractal. The real issue is "for the error in theory A, how bad are the results X, and is theory B much better at it?" If you're not going to do that, don't spend 40 pages (Ch. 1-4) on it. This is misleading to those not familiar with EMH, and boring to those who are.Don't look to this book for good math. In my edition (1991), careless and erroneous notations abound. Also, the equations are written in BASIC notation which is notoriously hard to visualize, but this is probably the fault of the editor/publisher. Peters makes frequent and unannounced jumps between the apparent rigor of math and loose conjectures. The math is distracting to a qualitative reader, and the conjectures irritating to the quantitative one. Better to cater to one audience, and do it well.Still, I would recommend this book as a good conceptual introduction to the subject. But if you're planning to go deeper, use the equations in this book at your own perils. Go to the source.

Excellent overview

Most probably there are two types of people who won't like this book. First, if you are a research scientist with a lot of experience in the field, you'll probably find the material a bit too "easy" (you know, people who write "it's easy like a senior undergrad math texbook" in their reviews). Certainly, you can learn a lot of the same stuff from original papers. On the other hand, learning from research papers is not the most efficient way (I have an M.S.(astrophysics)/B.S.(physics), and still get headaches reading them), and this book provides a great overview. Now I read the original papers from the link above with much better understanding. The second category who won't enjoy the book is dyed-in-the-wool "practitioners" in search of a magic formula. I don't think this book can be directly applied to creating a trading system. On the other hand, it will help you understand the markets better, which won't hurt your financial success. While the knowledge that S & P 500 has a fractal dimension of 1.26 won't give you too much edge, understanding that there is a strong statistical evidence for trending in the markets (e.g. Hurst exponent substantially > 0.5) can be an extra reason for the head of your trading firm yelling at you when you refused to cut your losses or to hold on to your winners. But, again, the book is mostly useful in the same sense as the philosophy class you took in college: it gives you a fresh perspective and lets you look at the world from a different angle.<p>In short, if you are interested in the markets and are not totally averse to science, you'll like this book a lot. It's the first book in finance which I found hard to put down. The text is written on an introductory level, explaining all new concepts. There are a lot of graphs and numerical results related to the market, and the author's thoughts and observations are most fascinating.

Future of maket analysis, innovative approach, limited scope

The book is very readable. The theories of chaos applied to the behavior of markets and instuments is clearly expressed. Peters's approach is somewhat biased toward the interpretation of Hurst's law. No doubt, it is amazing how an analysis in hydraulic engineering in the early 1900s shed light on the problem of variablility and prediction in complex systems, nevertheless its application to capital markets is fresh and propositive.