Power Law in India: Wealth Distribution, Stock Market Returns
Over the weekend, I came across this very interesting book: The Power Law of Information: Life in a Connected World, by Srinath Srinivasa.
The Power Law of Information investigates properties of frictionless, non-linear systems, and the unconventional thought processes needed to comprehend them. It also shows how information affects us in a variety of ways: be it human rationality, the spread of ideas in society, or global monetary systems. Drawing upon current research, author Srinath Srinivasa offers directions on how to model the new world taking shape and possibly to also steer it in the right direction.
You might have come across similar concept in Chris Anderson’s The Long Tail and Malcolm Gladwell’s Tipping Point. For a primer on Power Laws, go to Wikipedia.
Now let’s look at power laws in the Indian context - courtesy of two articles at Citebase:
The point is that a few Indians (eg. Ambanis, Tatas, Premji, etc.) account for a disproportionate share of wealth, and the ratio of their wealth to that of the average Indian is “extreme”.
We have looked at the price returns of individual stocks, with tick-by-tick data from the NSE and daily closing price data from both NSE and BSE. We find that the price returns in Indian markets follow a fat-tailed cumulative distribution, consistent with a power law having exponent α ∼ 3, similar to that observed in developed markets.
The point here is that not only are stocks highly correlated with each other, but also that very large moves (jumps in volatility) are much more common that what most people assume.
Food for thought.
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