Abstract for: System Dynamics and stock markets

This paper presents an analysis of the behaviour of a stock market; the London stock exchange main market as expressed in the FTSE 100 index. The paper examines the main features of the literature relating to the academic and practitioner views on market behaviour. One of the main pillars of current academic understanding of stock markets, the efficient market hypothesis, is examined and tested. A novel variation on a known flaw in the efficient markets hypothesis is examined; the sub-Monday variation on the Monday effect. Using actual data this variation is tested and found to be in violation of the efficient markets hypothesis. The paper describes two index/market designs; one with actual data and one with hypothetical data. Limitations of system dynamics models in data rich environments are illustrated. The models presented here are put forward as prototypes for the development of further stock market simulations. This paper presents a proof of concept that cyclical behaviours exist in stock markets and that stock markets are therefore amenable to analysis using the system dynamics paradigm.