Power-laws in economics and finance: some ideas from physics
AbstractWe discuss several models in order to shed light on the origin of power-law distributions and power-law correlations in financial time series. From an empirical point of view, the exponents describing the tails of the price increments distribution and the decay of the volatility correlations are rather robust and suggest universality. However, many of the models that appear naturally (for example, to account for the distribution of wealth) contain some multiplicative noise, which generically leads to *non universal exponents*. Recent progress in the empirical study of the volatility suggests that the volatility results from some sort of multiplicative cascade. A convincing `microscopic' (i.e. trader based) model that explains this observation is however not yet available. It would be particularly important to understand the relevance of the pseudo-geometric progression of natural human time scales on the long range nature of the volatility correlations.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 500023.
Date of creation: Aug 2000
Date of revision:
Publication status: Published in Quantitative Finance, proccedings of the 2000 Santa Fe conference
Find related papers by JEL classification:
- G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
This paper has been announced in the following NEP Reports:
- NEP-ALL-2005-02-13 (All new papers)
- NEP-FIN-2005-02-13 (Finance)
- NEP-FMK-2005-05-04 (Financial Markets)
- NEP-HPE-2005-02-14 (History & Philosophy of Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Iori, Giulia, 2002.
"A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 49(2), pages 269-285, October.
- Giulia Iori, 1999. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Finance 9905005, EconWPA.
- Giulia Iori, 2000. "A microsimulation of traders activity in the stock market: the role of heterogeneity, agents' interactions and trade frictions," Finance 0004007, EconWPA.
- J. Doyne Farmer, 1998.
"Market Force, Ecology, and Evolution,"
Research in Economics
98-12-117e, Santa Fe Institute.
- Rama Cont & Marc Potters & Jean-Philippe Bouchaud, 1997.
"Scaling in stock market data: stable laws and beyond,"
- Rama Cont & Marc Potters & Jean-Philippe Bouchaud, 1997. "Scaling in stock market data: stable laws and beyond," Science & Finance (CFM) working paper archive 9705087, Science & Finance, Capital Fund Management.
- J. Doyne Farmer, 1999. "Physicists Attempt to Scale the Ivory Towers of Finance," Working Papers 99-10-073, Santa Fe Institute.
- Irene Giardina & Jean-Philippe Bouchaud & Marc Mezard, 2000. "Population dynamics in a random environment," Science & Finance (CFM) working paper archive 500025, Science & Finance, Capital Fund Management.
- Hideaki Aoyama & Yuichi Nagahara & Mitsuhiro P. Okazaki & Wataru Souma & Hideki Takayasu & Misako Takayasu, 2000. "Pareto's Law for Income of Individuals and Debt of Bankrupt Companies," Papers cond-mat/0006038, arXiv.org.
- Jean Pierre Nadal & Denis Phan & Mirta B. Gordan & Jean Vannimenus, 2003. "Monopoly Market with Externality: an Analysis with Statistical Physics and ACE," Computational Economics 0312002, EconWPA.
- Jean-Pierre Nadal & Denis Phan & Mirta B. Gordon & Jean Vannimenus, 2003. "Monopoly Market with Externality: an Analysis with Statistical Physics and Agent Based Computational Economics," Papers cond-mat/0311096, arXiv.org.
- Jean-Pierre Nadal & Denis Phan & Mirta Gordon & Jean Vannimenus, 2005. "Multiple equilibria in a monopoly market with heterogeneous agents and externalities," Quantitative Finance, Taylor & Francis Journals, vol. 5(6), pages 557-568.
- Denis Phan & Stephane Pajot & Jean-Pierre Nadal, 2003. "The Monopolist's Market with Discrete Choices and Network Externality Revisited: Small-Worlds, Phase Transition and Avalanches in an ACE Framework," Computing in Economics and Finance 2003 150, Society for Computational Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Marc Potters).
If references are entirely missing, you can add them using this form.