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Applications of physics to economics and finance: Money, income, wealth, and the stock market

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  • Adrian A. Dragulescu

Abstract

Several problems arising in Economics and Finance are analyzed using concepts and quantitative methods from Physics. Here is the abridged abstact: Chapter 1: By analogy with energy, the equilibrium probability distribution of money must follow the exponential Boltzmann-Gibbs law characterized by an effective temperature equal to the average amount of money per economic agent. A thermal machine which extracts a monetary profit can be constructed between two economic systems with different temperatures. Chapter 2: Using data from several sources, it is found that the distribution of income is described for the great majority of population by an exponential distribution, whereas the high-end tail follows a power law. The Lorenz curve and Gini coefficient were calculated and are shown to be in good agreement with both income and wealth data sets. Chapter 3: The Heston model where stock-price dynamics is governed by a geometrical (multiplicative) Brownian motion with stochastic variance is studied. The corresponding Fokker-Planck equation is solved exactly. Integrating out the variance, an analytic formula for the time-dependent probability distribution of stock price changes (returns) is found. The formula is in excellent agreement with the Dow-Jones index for the time lags from 1 to 250 trading days.

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  • Adrian A. Dragulescu, 2003. "Applications of physics to economics and finance: Money, income, wealth, and the stock market," Papers cond-mat/0307341, arXiv.org, revised Jul 2003.
    • Handle: RePEc:arx:papers:cond-mat/0307341
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    Cited by:

    1. Saurabh Mishra & Bilal M. Ayyub, 2019. "Shannon Entropy for Quantifying Uncertainty and Risk in Economic Disparity," Risk Analysis, John Wiley & Sons, vol. 39(10), pages 2160-2181, October.
    2. Diniz, M. & Mendes, F.M., 2012. "Effects of taxation on money distribution," International Review of Financial Analysis, Elsevier, vol. 23(C), pages 81-85.
    3. Wright, Ian, 2005. "The social architecture of capitalism," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 346(3), pages 589-620.
    4. Fabio Clementi & Mauro Gallegati, 2005. "Pareto's Law of Income Distribution: Evidence for Grermany, the United Kingdom, and the United States," Microeconomics 0505006, University Library of Munich, Germany.
    5. Elvis Oltean, 2016. "Modelling income, wealth, and expenditure data by use of Econophysics," Papers 1603.08383, arXiv.org.
    6. Wright, Ian, 2009. "Implicit Microfoundations for Macroeconomics," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 3, pages 1-27.

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