This file is part of IDEAS, which uses RePEc data


[ Papers | Articles | Software | Books | Chapters | Authors | Institutions | JEL Classification | NEP reports | Search | New papers by email | Author registration | Rankings | Volunteers | FAQ | Blog | Help! ]

Random walks, liquidity molasses and critical response in financial markets

Author info | Abstract | Publisher info | Download info | Related research | Statistics
Author Info
Jean-Philippe Bouchaud (Science & Finance, Capital Fund Management)
Julien Kockelkoren (Capital Fund Management)
Marc Potters (Science & Finance, Capital Fund Management)

Additional information is available for the following registered author(s):

Abstract

Stock prices are observed to be random walks in time despite a strong, long term memory in the signs of trades (buys or sells). Lillo and Farmer have recently suggested that these correlations are compensated by opposite long ranged fluctuations in liquidity, with an otherwise permanent market impact, challenging the scenario proposed in Quantitative Finance 4, 176 (2004), where the impact is *transient*, with a power-law decay in time. The exponent of this decay is precisely tuned to a critical value, ensuring simultaneously that prices are diffusive on long time scales and that the response function is nearly constant. We provide new analysis of empirical data that confirm and make more precise our previous claims. We show that the power-law decay of the bare impact function comes both from an excess flow of limit order opposite to the market order flow, and to a systematic anti-correlation of the bid-ask motion between trades, two effects that create a `liquidity molasses' which dampens market volatility.

Download Info
To download:

If you experience problems downloading a file, check if you have the proper application to view it first. Information about this may be contained in the File-Format links below. In case of further problems read the IDEAS help file. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.cfm.fr/papers/0406224.pdf
File Format: application/pdf
File Function:
Download Restriction: no

Publisher Info
Paper provided by Science & Finance, Capital Fund Management in its series Science & Finance (CFM) working paper archive with number 500063.

Download reference. The following formats are available: HTML, plain text, BibTeX, RIS (EndNote), ReDIF
Length:
Date of creation: Jun 2004
Date of revision:
Handle: RePEc:sfi:sfiwpa:500063

Contact details of provider:
Postal: 6 boulevard Haussmann, 75009 Paris, FRANCE
Phone: +33.1.4949.5949
Fax: +33.1.4770.1740
Email:
Web page: http://www.science-finance.fr/
More information through EDIRC

For technical questions regarding this item, or to correct its listing, contact: (Marc Potters).

Related research
Keywords:

Other versions of this item:

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:

References listed on IDEAS
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.:
  1. Lux, T. & M. Marchesi, . "Volatility Clustering in Financial Markets: A Micro-Simulation of Interacting Agents," Discussion Paper Serie B 437, University of Bonn, Germany, revised Jul 1998.
  2. Lux, Thomas, 1996. "The Stable Paretian Hypothesis and the Frequency of Large Returns: An Examination of Major German Stocks," Applied Financial Economics, Taylor and Francis Journals, vol. 6(6), pages 463-75, December. [Downloadable!] (restricted)
  3. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March. [Downloadable!] (restricted)
  4. Fabrizio Lillo & J. Farmer, 2004. "The Long Memory of the Efficient Market," Studies in Nonlinear Dynamics & Econometrics, Berkeley Electronic Press, vol. 8(3), pages 1226-1226. [Downloadable!] (restricted)
  5. Jean-Philippe Bouchaud & Marc Mezard & Marc Potters, 2002. "Statistical properties of stock order books: empirical results and models," Science & Finance (CFM) working paper archive 0203511, Science & Finance, Capital Fund Management. [Downloadable!]
  6. Shiller, Robert J, 1981. "Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends?," American Economic Review, American Economic Association, vol. 71(3), pages 421-36, June. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, 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.)

  1. Matthieu Wyart & Jean-Philippe Bouchaud & Julien Kockelkoren & Marc Potters & Michele Vettorazzo, 2006. "Relation between Bid-Ask Spread, Impact and Volatility in Double Auction Markets," Science & Finance (CFM) working paper archive 500067, Science & Finance, Capital Fund Management. [Downloadable!]
  2. J. Doyne Farmer & Austin Gerig & Fabrizio Lillo & Szabolcs Mike, 2006. "Market efficiency and the long-memory of supply and demand: is price impact variable and permanent or fixed and temporary?," Quantitative Finance, Taylor and Francis Journals, vol. 6(2), pages 107-112, April. [Downloadable!] (restricted)
Statistics
Access and download statistics

Did you know? You can use IDEAS to provide links to papers and articles in your course syllabus.

This page was last updated on 2008-12-2.


This information is provided to you by IDEAS at the Department of Economics, College of Liberal Arts and Sciences, University of Connecticut using RePEc data on a server sponsored by the Society for Economic Dynamics.