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Long Range Interaction Generating Fat-Tails in Finance

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Author Info

  • Marco Airoldi

    (MedioBanca)

  • Vito Antonelli

    (Universita' degli Studi di Milano & INFN Milano)

  • Bruno Bassetti

    (Universita' degli Studi di Milano & INFN Milano)

  • Andrea Martinelli

    (Banca Intesa)

  • Marco Picariello

    (Universita' degli Studi di Milano & INFN Milano)

Abstract

It's commonly known that the correlation between stocks increases during market turbulent periods. In this work we propose a modellization of this feature, viewed as a collective effect, rearranging a toy-model first proposed in 2001. Equities are modelled as quasi random walk variables, where the non-Brownian components of stocks movement are linked to the market trend via a long range interaction function. Our model generates fat tails for stock probability distributions and implied volatility surfaces analogous to real data, suggesting an unitary picture of long range interaction, fat tails and volatility smiles.

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File URL: http://128.118.178.162/eps/ge/papers/0404/0404006.ps.gz
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Bibliographic Info

Paper provided by EconWPA in its series GE, Growth, Math methods with number 0404006.

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Length: 13 pages
Date of creation: 27 Apr 2004
Date of revision: 27 Apr 2004
Handle: RePEc:wpa:wuwpge:0404006

Note: Type of Document - tar.gz; pages: 13. 13 pages, latex, 7 figures
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Web page: http://128.118.178.162

Related research

Keywords: Mathematical models; quantitative finance; interactions and correlations;

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References

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