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Replicating financial market dynamics with a simple self-organized critical lattice model

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  • B. Dupoyet
  • H. R. Fiebig
  • D. P. Musgrove
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    Abstract

    We explore a simple lattice field model intended to describe statistical properties of high frequency financial markets. The model is relevant in the cross-disciplinary area of econophysics. Its signature feature is the emergence of a self-organized critical state. This implies scale invariance of the model, without tuning parameters. Prominent results of our simulation are time series of gains, prices, volatility, and gains frequency distributions, which all compare favorably to features of historical market data. Applying a standard GARCH(1,1) fit to the lattice model gives results that are almost indistinguishable from historical NASDAQ data.

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    File URL: http://arxiv.org/pdf/1010.4831
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    Paper provided by arXiv.org in its series Papers with number 1010.4831.

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    Date of creation: Oct 2010
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    Handle: RePEc:arx:papers:1010.4831

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    1. Bollerslev, Tim, 1986. "Generalized autoregressive conditional heteroskedasticity," Journal of Econometrics, Elsevier, Elsevier, vol. 31(3), pages 307-327, April.
    2. Ausloos, Marcel & Clippe, Paulette & Pȩkalski, Andrzej, 2004. "Evolution of economic entities under heterogeneous political/environmental conditions within a Bak–Sneppen-like dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, Elsevier, vol. 332(C), pages 394-402.
    3. P. Bak & M. Paczuski & M. Shubik, 1996. "Price Variations in a Stock Market with Many Agents," Working Papers, Santa Fe Institute 96-09-075, Santa Fe Institute.
    4. Ser-Huang Poon & Clive W.J. Granger, 2003. "Forecasting Volatility in Financial Markets: A Review," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 478-539, June.
    5. Kirill Ilinski, 1997. "Physics of Finance," Papers hep-th/9710148, arXiv.org.
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