AN ANALYSIS OF STABILITY OF TRENDS IN MUTUAL FUNDS USING FRACTAL DIMENSION INDEX (FDI) COMPUTED FROM HURST EXPONENTS

Abstract

The general belief is that the NAV’s of the mutual funds take a random and unpredictable path and that it is impossible to outperform the market without assuming additional risk. However, it is possible to outperform the market by carefully selecting entry and exit points for equity investments. Chaos is a nonlinear, dynamic system that appears to be random but is actually a higher form of order. All chaotic systems have a quantifying measurement known as a fractal dimension. The fractal dimension index (FDI) is a tool that applies the principles of chaos theory and fractals. With FDI one can determine the persistence or anti-persistence of any equity or commodity. In this paper we study the data from mutual funds by computing the fractal dimension index. The fractal dimension index is computed from the Hurst exponent, which is computed from Rescaled Range R/S.