The modelling of financial markets presents a problem which is both theoretically challenging and practically important. The theoretical aspects concern the issue of market efficiency which may even have political implications, whilst the practical side of the problem has clear relevance to portfolio management and derivative pricing. Up till now all market models contain ``smart money" traders and ``noise" traders whose joint activity constitutes the market. On a short time scale this traditional separation does not seem to be realistic, and is hardly acceptable since all high-frequency market participants are professional traders and cannot be separated into ``smart" and ``noisy". In this paper we present a ``microscopic" model with homogenuous quasi- rational behaviour of traders, aiming to describe short time market behaviour. To construct the model we use an analogy between ``screening" in quantum electrodynamics and an equilibration process in a market with temporal mispricing. As a result, we obtain the time-dependent distribution function of the returns which is in quantitative agreement with real market data and obeys the anomalous scaling relations recently reported for both high-frequency exchange rates, S\&P500 and other stock market indices.
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Paper provided by EconWPA in its series Finance with number
9805007.
Length: 9 pages Date of creation: 03 Jun 1998 Date of revision: Handle: RePEc:wpa:wuwpfi:9805007
Note: Type of Document - Postscript file; prepared on UNIX Sparc TeX; to print on HP/PostScript; pages: 9 ; figures: two figures included Contact details of provider: Web page: http://129.3.20.41
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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.:
De Long, J Bradford & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, 1990.
"Noise Trader Risk in Financial Markets,"
Journal of Political Economy,
University of Chicago Press, vol. 98(4), pages 703-38, August.
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