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Power law distributions and dynamic behaviour of stock markets

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  • P. Richmond

    (Department of Physics, Trinity College, Dublin 2, Ireland)

Abstract

A simple agent model is introduced by analogy with the mean field approach to the Ising model for a magnetic system. Our model is characterised by a generalised Langevin equation = F ϕ + G ϕ t where t is the usual Gaussian white noise, i.e.: t t ′ = 2Dδ t-t ′ and t = 0. Both the associated Fokker Planck equation and the long time probability distribution function can be obtained analytically. A steady state solution may be expressed as P ϕ = exp{ - Ψ ϕ - ln G(ϕ)} where Ψ ϕ = - F/ G dϕ and Z is a normalization factor. This is explored for the simple case where F ϕ = Jϕ + bϕ2 - cϕ3 and fluctuations characterised by the amplitude G ϕ = ϕ + ɛ when it readily yields for ϕ≫ɛ, a distribution function with power law tails, viz: P ϕ = exp{ 2bϕ-cϕ2 /D}. The parameter c ensures convergence of the distribution function for large values of ϕ. It might be loosely associated with the activity of so-called value traders. The parameter J may be associated with the activity of noise traders. Output for the associated time series show all the characteristics of familiar financial time series providing J

Suggested Citation

  • P. Richmond, 2001. "Power law distributions and dynamic behaviour of stock markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 20(4), pages 523-526, April.
    • Handle: RePEc:spr:eurphb:v:20:y:2001:i:4:d:10.1007_pl00011108
    DOI: 10.1007/PL00011108
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    Citations

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    Cited by:

    1. Urbanowicz, Krzysztof & Richmond, Peter & Hołyst, Janusz A., 2007. "Risk evaluation with enhanced covariance matrix," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 384(2), pages 468-474.
    2. Navarro-Barrientos, Jesús Emeterio & Cantero-Álvarez, Rubén & Matias Rodrigues, João F. & Schweitzer, Frank, 2008. "Investments in random environments," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(8), pages 2035-2046.
    3. Solomon, Sorin & Richmond, Peter, 2001. "Power laws of wealth, market order volumes and market returns," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 188-197.
    4. Bucsa, G. & Jovanovic, F. & Schinckus, C., 2011. "A unified model for price return distributions used in econophysics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(20), pages 3435-3443.
    5. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034.

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