The canonical econophysics approach to the flash crash of May 6, 2010
AbstractWe 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 InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 29138.
Date of creation: 2011
Date of revision:
Publication status: Published in Applied Mathematical Sciences 5.28(2011): pp. 1373-1389
flash crash; econophysics; stable distribution; extreme events;
Find related papers by JEL classification:
- C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
- G01 - Financial Economics - - General - - - Financial Crises
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-03-05 (All new papers)
- NEP-ECM-2011-03-05 (Econometrics)
- NEP-HME-2011-03-05 (Heterodox Microeconomics)
- NEP-RMG-2011-03-05 (Risk Management)
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