Mandelbrot Market-Model and Momentum

Abstract

Mandelbrot was one of the first who criticized the oversimplifications in finance modeling. In his view, markets have long-term memory, were fractal and thus much wilder than classical theory suggests. Recently, we were able to show that the scaling behaviour of trends, as defined by a specific trend decomposition using wavelets, are causing the momentum effect. In this work, we will show that this effect can be modeled by fractal trends. The so-called Mandelbrot Market-Model shows that markets are wilder compared with classical models. In conclusion, we derive what Mandelbrot always knew: There are no efficient markets.