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The canonical econophysics approach to the flash crash of May 6, 2010

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  • Mazzeu, Joao
  • Otuki, Thiago
  • Da Silva, Sergio

Abstract

We carry out a statistical physics analysis of the flash crash of May 6, 2010 using data from the Dow Jones Industrial Average index sampled at a one-minute frequency from September 1, 2009 to May 31, 2010. We evaluate the hypothesis of a non-Gaussian Levy-stable distribution to model the data and pay particular attention to the distribution-tail behavior. We conclude that there is non-Gaussian scaling and thus that the flash crash cannot be considered an anomaly. From the study of tails, we find that the flash crash followed a power-law pattern outside the Levy regime, which was not the inverse cubic law. Finally, we show that the time-dependent variance of the DJIA-index returns, not tracked by the Levy, can be modeled in a straightforward manner by a GARCH (1, 1) process.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 29138.

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Date of creation: 2011
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Publication status: Published in Applied Mathematical Sciences 5.28(2011): pp. 1373-1389
Handle: RePEc:pra:mprapa:29138

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Keywords: flash crash; econophysics; stable distribution; extreme events;

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