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A dynamical model of the capital markets

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  • Moffat, J.W.

Abstract

A dynamical theory of the capital markets is proposed based on a continuous-time model and a basic differential equation that governs the price differential, derived by analogy from hydrodynamic flow. A critical number M determines the onset of turbulent behavior of volatility. Scaling laws are formulated for the time-series spectra of volatility distributions, which show intermittency associated with a fractal behavior of the distribution functions. This model may help in an understanding of volatility risk and the relationship between short- and long-term trading in the financial markets.

Suggested Citation

  • Moffat, J.W., 1999. "A dynamical model of the capital markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 264(3), pages 532-542.
  • Handle: RePEc:eee:phsmap:v:264:y:1999:i:3:p:532-542
    DOI: 10.1016/S0378-4371(98)00453-1
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    1. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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