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Trading leads to scale-free self-organization

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  • Ebert, M.
  • Paul, W.
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    Abstract

    Financial markets display scale-free behavior in many different aspects. The power-law behavior of part of the distribution of individual wealth has been recognized by Pareto as early as the nineteenth century. Heavy-tailed and scale-free behavior of the distribution of returns of different financial assets have been confirmed in a series of works. The existence of a Pareto-like distribution of the wealth of market participants has been connected with the scale-free distribution of trading volumes and price-returns. The origin of the Pareto-like wealth distribution, however, remained obscure. Here we show that in a market where the imbalance of supply and demand determines the direction of prize changes, it is the process of trading itself that spontaneously leads to a self-organization of the market with a Pareto-like wealth distribution for the market participants and at the same time to a scale-free behavior of return fluctuations and trading volume distributions.

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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): 23 ()
    Pages: 6033-6038

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    Handle: RePEc:eee:phsmap:v:391:y:2012:i:23:p:6033-6038

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

    Related research

    Keywords: Econophysics; Self-organization; Scale-free behavior;

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