fractal market hypothesis (FMH)

Definition

New capital-market theory that combines fractals and other concept from chaos theory with the traditional quantitative methods to explain and predict market behavior. FMH takes into account the daily randomness of the market and anomalies such as market crashes and stampedes. It proposes that a (1) market is stable and has sufficient liquidity when it comprises of investors with different time horizons, (2) these investors stay in their 'preferred habitat' (time horizon), no matter what the market information indicates, (3) the available information may not be reflected in the market prices, and (4) the market prices trend indicates the changes in expected earnings (which mirror long-term economic trends). Proposed by Edgar E. Peters, author of the 1991 book 'Chaos and order In The Capital Markets' and the 1994 book 'Fractal Market Analysis: Applying Chaos Theory to Investment and Economics.' See also capital market theories.