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The minimal model of financial complexity

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  • Philip Z. Maymin

Abstract

A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.

Suggested Citation

  • Philip Z. Maymin, 2011. "The minimal model of financial complexity," Quantitative Finance, Taylor & Francis Journals, vol. 11(9), pages 1371-1378, February.
    • Handle: RePEc:taf:quantf:v:11:y:2011:i:9:p:1371-1378
    DOI: 10.1080/14697681003709447
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    References listed on IDEAS

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    1. Andrew L. Turner & Eric J. Weigel, 1992. "Daily Stock Market Volatility: 1928--1989," Management Science, INFORMS, vol. 38(11), pages 1586-1609, November.
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    Cited by:

    1. Alexandros M. Goulielmos, 2015. "The Multi-faceted Character of Risk in Maritime Freight Markets (Panamax) 1996-2012," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(1-2), pages 67-86, January-M.
    2. Philip Z. Maymin, 2014. "A New Algorithmic Approach to Entangled Political Economy: Insights from the Simplest Models of Complexity," Advances in Austrian Economics, in: Entangled Political Economy, volume 18, pages 213-236, Emerald Group Publishing Limited.
    3. Philip Z. MAYMIN, 2018. "The Conventional Past, Behavioral Present, and Algorithmic Future of Risk and Finance," Finante - provocarile viitorului (Finance - Challenges of the Future), University of Craiova, Faculty of Economics and Business Administration, vol. 1(20), pages 74-84, November.
    4. Philip Z. Maymin, 2010. "Schizophrenic Representative Investors," Papers 1004.4592, arXiv.org.
    5. Philip Z. Maymin, 2012. "A New Kind of Finance," Papers 1210.1588, arXiv.org.

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