Customer Reviews

Chaos and Order in the Capital Markets: A New View of Cycles, Prices, and Market Volatility (Wiley Finance)

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Most probably there are two types of people who won't like this book. First, if you are a research scientist with a lot of experience in the field, you'll probably find the material a bit too "easy" (you know, people who write "it's easy like a senior undergrad math texbook" in their reviews). Certainly, you can learn a lot of the same stuff from original papers. On the other hand, learning from research papers is not the most efficient way (I have an M.S.(astrophysics)/B.S.(physics), and still get headaches reading them), and this book provides a great overview. Now I read the original papers from the link above with much better understanding. The second category who won't enjoy the book is dyed-in-the-wool "practitioners" in search of a magic formula. I don't think this book can be directly applied to creating a trading system. On the other hand, it will help you understand the markets better, which won't hurt your financial success. While the knowledge that S&P 500 has a fractal dimension of 1.26 won't give you too much edge, understanding that there is a strong statistical evidence for trending in the markets (e.g. Hurst exponent substantially > 0.5) can be an extra reason for the head of your trading firm yelling at you when you refused to cut your losses or to hold on to your winners. But, again, the book is mostly useful in the same sense as the philosophy class you took in college: it gives you a fresh perspective and lets you look at the world from a different angle.

In short, if you are interested in the markets and are not totally averse to science, you'll like this book a lot. It's the first book in finance which I found hard to put down. The text is written on an introductory level, explaining all new concepts. There are a lot of graphs and numerical results related to the market, and the author's thoughts and observations are most fascinating.

The book is very readable. The theories of chaos applied to the behavior of markets and instuments is clearly expressed. Peters's approach is somewhat biased toward the interpretation of Hurst's law. No doubt, it is amazing how an analysis in hydraulic engineering in the early 1900s shed light on the problem of variablility and prediction in complex systems, nevertheless its application to capital markets is fresh and propositive.

The second edition of this book was published in 1996. The book
seems to be largely based on Feder's 1988 book "Fractals". The
dated nature of this book means that it is missing later work
on long memory processes, which Peters estimates using the Hurst
exponent.

As one reviewer already noted, don't assume that this book will
provide much in the way of useful equations. For anyone who wants
more than an overview, this book is a disappointment. Peters does
a poor job of explaining the equations and I did not find enough
detail to implement the algorithms discussed (I turned to Feder's
book and various journal articles). The book does come with a
"floppy" disk containing the Visual Basic algorithms. This is
a poor choice, since C is pretty much the lingua franca for
algorithms.

The various chaos and fractal techniques are applied to a handful
of financial data sets, but this is far from even a solid
suggestion that these techniques might be useful to anyone
developing real market models.

Some of the conclusions that Peters draws (cycles in financial
data) do not seem to be supported the evidence he presents.

In summary, if you are looking for something beyond an overview,
save your money. Feder ("Fractals") has a better description of
RS calculation. "A Non-Random Walk Down Wall Street" by Lo
and MacKinlay has a chapeter on the application of the RS
statistic and long-memory processes which is much better than
Peters. For those who need to simulate fractal brownian motion
(data sets with a particular Hurst exponent) "The Science of
Fractal Images" by Barnsley et all is a good reference.

If you're looking for a purely conceptual introduction to how chaos theory can be applied to financial markets, this book is as good a source as any. Peters's discussion of R/S statistics and the graphical examples drawn from the markets are clear and intuitive (Ch. 7-8). The key point demonstrating long-term memory effects in the market is well made.

However he spends an inordinate amount of time attacking the foundations of the efficient market hypothesis (EMH) to the point of being boring, yet the argument boils down to "it has errors when compared to reality". Duh, so does every other theory, including fractal. The real issue is "for the error in theory A, how bad are the results X, and is theory B much better at it?" If you're not going to do that, don't spend 40 pages (Ch. 1-4) on it. This is misleading to those not familiar with EMH, and boring to those who are.

Don't look to this book for good math. In my edition (1991), careless and erroneous notations abound. Also, the equations are written in BASIC notation which is notoriously hard to visualize, but this is probably the fault of the editor/publisher. Peters makes frequent and unannounced jumps between the apparent rigor of math and loose conjectures. The math is distracting to a qualitative reader, and the conjectures irritating to the quantitative one. Better to cater to one audience, and do it well.

Still, I would recommend this book as a good conceptual introduction to the subject. But if you're planning to go deeper, use the equations in this book at your own perils. Go to the source.

I read this book, the 1991 version, years ago. Around 1980 my own attempts to crack share prices statistically convinced me that all share prices behaved like a Gaussian random walk meaning that all speculation was comparable with playing roulette and I am not one of those guys who usually wins when gambling. This view was strengthened when the option pricing model came up, meaning that even the real pro's in the field assume that share prices are nothing but a random walk. This book has opened my eyes to the fact that there is much more to randomness than just the Gaussian curve. Share prices are not fully random. Impressive is the demonstration that an RS analysis on the real data is different when applying the same RS analysis on scrambled data. So there is information hidden in these time series, somewhere. Since then I have picked up the subject of cracking time series again with great pleasure. I think this book is exceptionally well written and without it I doubt if I would have been able to follow Mandelbrot's book "scaling and fractals in finance" that I bought later. The book is about understanding a subject, not about learning a simple formula to apply on a time series.

For those of you intrigued by chaos versus the financial markets, I would suggest you get the basic knowledge in Garnett P. Williams "Chaos Theory Tamed" (if you don't mind being explained in the first twenty chapters things like the laws of exponents and logarithms), or the Devaney books, for people with some maths. By the time you finish these honest, carefully and painstakingly written books, you will have a fair understanding of what chaos theory is about, and you will also see that while it is interesting stuff, it is hard to imagine it having any practical relevance to finance, since finance is the realm of stochastic, not deterministic phenomena.

Mr. Peters' readers will not have the chance of gaining such a perspective on chaos or on finance, alas. Mr. Peters hasn't produced a clear, comprehensible text, but rather a imprecise and frustrating piece, presumably written in a very short time, filled with a huge number of graphs having epsilon informational content. It is also full of conceptual mistakes - Mr. Peters most probably doesn't have a good grasp of what he's speaking about, but to be fair, it is hard to tell since the implicit message of the book is: "Hey, like I'm going to give out all my secrets...! Forget it, baby!", so the readers are never given all of the story. Readers therefore have to decide whether they believe that the author has found a meaningful and secret way to use chaos, that unfortunately will not be revealed, or whether the author should be put in the same category as those who write about Crystals or Financial Astrology.

Can smart people make profit with chaos theory? Certainly! However, the only way to do so is by writing books about it...

Profit which seems interesting, since Wiley accepted to publish a second product from Mr. Peters, thereby losing all credibility as an editor of financial books.

I have a university maths degree and found the book very obvious and drawn out for the first few chapters. In spite of this I looked forward to what was going to be explained later. Suddenly from a very simple and easy to understand explanation on the EMH he starts to use mathematics in his equations that I had a lot of difficulty following. There was very little or no explanation of how these equations were arrived at and a lot of mathematics and statisics is assumed. This book does not apply the theory in ny meaningful way to the markets let alone the capital markets in my opinion. I found that I took very little away from this book and would not recommend it to anyone who has basic mathematics like myself or is looking for some deeper insight into the markets. I would hate to have Mr Peters as a teacher based on his book.