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Stochastic simulations of time series within Weierstrass-Mandelbrot walks

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  • R. Kutner
  • F. Switała

Abstract

In the present work we extend Levy walks to allow the velocity of the walker to vary. We call these extended Levy walks Weierstrass-Mandelbrot walks. This is a generalized model of the Levy walk type which is still able to describe both stationary and non-stationary stochastic time series by treating the initial step of the walker differently. The model was partly motivated by the properties of financial time series and tested on empirical data extracted from the Warsaw stock exchange since it offers an opportunity to study in an unbiased way several features of the stock exchange in its early stages. We extended the continuous-time random walk formalism but the (generalized) waiting-time distribution (WTD) and sojourn probability density still play a fundamental role. We considered a one-dimensional, non-Brownian random walk where the walker moves, in general, with a velocity that assumes a different constant value between the successive turning points, i.e. the velocity is a piecewise constant function. So far the models which have been developed take only one chosen value of this velocity into account and therefore are unable to consider more realistic stochastic time series. Moreover, our model is a kind of Levy walk where we assume a hierarchical, self-similar in the stochastic sense, spatio-temporal representation of WTD and sojourn probability density. The Weierstrass-Mandelbrot walk model makes it possible to analyse both the structure of the Hurst exponent and the power-law behaviour of kurtosis. This structure results from the hierarchical, spatio-temporal coupling between the walker displacement and the corresponding time of the walks. The analysis makes use of both the fractional diffusion and the super-Burnett coefficients. We constructed the diffusion phase diagram which distinguishes regions occupied by classes of different universality. We study only such classes which are characteristic of stationary situations. We proved that even after taking a moving averaging of the stochastic time series which makes results stationary in the sense that they are independent of the beginning moment of the random walk, it is still possible to see the non-Gaussian features of the basic stochastic process. We thus have a model ready for describing data presented, e.g., in the form of moving averages. This operation is often used for stochastic time series, especially financial ones. Based on the hierarchical representation of WTD we introduce an efficient Monte Carlo algorithm which makes a numerical simulation of individual runs of stochastic time series possible; this facilitates the study of empirical stochastic time series.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

Volume (Year): 3 (2003)
Issue (Month): 3 ()
Pages: 201-211

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Handle: RePEc:taf:quantf:v:3:y:2003:i:3:p:201-211

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Cited by:
  1. Jaume Masoliver & Miquel Montero & Josep Perello, . "The continuous time random walk formalism in financial markets," Modeling, Computing, and Mastering Complexity 2003 24, Society for Computational Economics.
  2. Javier Villarroel & Miquel Montero, 2008. "On properties of Continuous-Time Random Walks with Non-Poissonian jump-times," Papers 0812.2148, arXiv.org.
  3. Scalas, Enrico, 2006. "The application of continuous-time random walks in finance and economics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 362(2), pages 225-239.

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