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Impact of uncertainty in expected return estimation on stock price volatility

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  • Kostanjcar, Zvonko
  • Jeren, Branko
  • Juretic, Zeljan
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    Abstract

    We investigate the origin of volatility in financial markets by defining an analytical model for time evolution of stock share prices. The defined model is similar to the GARCH class of models, but can additionally exhibit bimodal behaviour in the supply–demand structure of the market. Moreover, it differs from existing Ising-type models. It turns out that the constructed model is a solution of a thermodynamic limit of a Gibbs probability measure when the number of traders and the number of stock shares approaches infinity. The energy functional of the Gibbs probability measure is derived from the Nash equilibrium of the underlying game.

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    Bibliographic Info

    Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

    Volume (Year): 391 (2012)
    Issue (Month): 22 ()
    Pages: 5563-5571

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    Handle: RePEc:eee:phsmap:v:391:y:2012:i:22:p:5563-5571

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    Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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    Keywords: Complex systems; Financial markets; Equilibrium states; Volatility;

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