Probability of Large Movements in Financial Markets

TL;DR

This paper demonstrates that large movements in financial markets follow a super-universal power law, where the likelihood of significant changes is inversely related to the duration of low-variability periods, supported by empirical data.

Contribution

It empirically confirms a theoretical prediction that the probability of large market movements scales inversely with the length of low-variability periods, revealing a super-universal law.

Findings

Large movements follow a power law distribution

Probability inversely proportional to low-variability period length

Supports previous theoretical predictions

Abstract

Based on empirical financial time-series, we show that the "silence-breaking" probability follows a super-universal power law: the probability of observing a large movement is inversely proportional to the length of the on-going low-variability period. Such a scaling law has been previously predicted theoretically [R. Kitt, J. Kalda, Physica A 353 (2005) 480], assuming that the length-distribution of the low-variability periods follows a multiscaling power law.