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Discussing the article: "The Hypothesis of Randomness: Searching for Hidden Patterns in Price Series"

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Check out the new article: The Hypothesis of Randomness: Searching for Hidden Patterns in Price Series.

The article describes a test of the hypothesis of randomness for quotes based on a chi-square statistic derived from the frequencies of overlapping s-chains. The article shows how to define discrete states and compare observed and expected frequencies in order to detect Markov memory in price increments. This approach helps distinguish structural dependence from noise and formalize the testing of trading hypotheses.

In statistical problems, the initial data are often treated as a random sample from a certain distribution; that is, the components of the data vector are considered to be independent and identically distributed random variables. In many problems, this assumption is uncontroversial, since it follows from the nature of the data itself. But sometimes this initial assumption itself needs to be tested and is treated as a statistical hypothesis known as the hypothesis of randomness.

A classic example is quality control for pseudorandom number generators (PRNGs). Software algorithms generate sequences that must be statistically indistinguishable from truly independent and uniformly distributed random variables on the unit interval [0,1]. Therefore, it is necessary to monitor the quality of such pseudorandom numbers, which ultimately amounts to testing the hypothesis of randomness.

Testing this hypothesis on financial instrument quotes can provide valuable information to analysts who develop trading systems based on detecting statistically significant deviations from the efficient market hypothesis. This article discusses testing the hypothesis of randomness using the chi-square test. This is a versatile and well-studied method that can be used to test various statistical hypotheses; it is based on a comparison of the observed and expected frequencies of events. Most importantly, it is relatively easy to put into practice.


Author: Evgeniy Chernish

Thank you, that’s an interesting article. I hope this is the start of a series.

Price gives you time, and time gives you price. It couldn’t be simpler. It takes no more than a minute to work it out, even using the buttons on a calculator.
Rain makes a puddle, a puddle makes rain
Aleksey Nikolayev #:

Thank you, that’s an interesting article. I hope this is the start of a series.

Thank you. It probably won’t be a series, but there might be something else to come as I test out some hypotheses.
Evgeniy Chernish #:
Thank you. There probably won’t be a series, but there might still be something to come out of testing the hypotheses.
In my humble opinion, it would be interesting to hear about the tuning process.
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