Inverse Statistics in Economics : The gain-loss asymmetry

TL;DR

This paper investigates the distribution of waiting times for achieving specific returns in financial markets, revealing a pronounced gain-loss asymmetry at short horizons that reflects underlying market dynamics.

Contribution

It introduces the concept of investment horizons distribution in inverse statistics and reports the observed gain-loss asymmetry in market data.

Findings

Gain-loss asymmetry is most pronounced at short investment horizons.

The distribution of waiting times peaks at an optimal horizon for given returns.

Asymmetry reflects intrinsic market dynamics and behavior.

Abstract

Inverse statistics in economics is considered. We argue that the natural candidate for such statistics is the investment horizons distribution. This distribution of waiting times needed to achieve a predefined level of return is obtained from (often detrended) historic asset prices. Such a distribution typically goes through a maximum at a time called the {\em optimal investment horizon}, $\tau^*_\rho$, since this defines the most likely waiting time for obtaining a given return $\rho$. By considering equal positive and negative levels of return, we report on a quantitative gain-loss asymmetry most pronounced for short horizons. It is argued that this asymmetry reflects the market dynamics and we speculate over the origin of this asymmetry.