Power laws of wealth, market order volumes and market returns
Using the Generalized Lotka Volterra model adapted to deal with mutiagent systems we can investigate economic systems from a general viewpoint and obtain generic features common to most economies. Assuming only weak generic assumptions on capital dynamics, we are able to obtain very specific predictions for the distribution of social wealth. First, we show that in a ‘fair’ market, the wealth distribution among individual investors fulfills a power law. We then argue that ‘fair play’ for capital and minimal socio-biological needs of the humans traps the economy within a power law wealth distribution with a particular Pareto exponent α∼32. In particular, we relate it to the average number of individuals L depending on the average wealth: α∼L/(L−1). Then we connect it to certain power exponents characterizing the stock markets. We find that the distribution of volumes of the individual (buy and sell) orders follows a power law with similar exponent β∼α∼32. Consequently, in a market where trades take place by matching pairs of such sell and buy orders, the corresponding exponent for the market returns is expected to be of order γ∼2α∼3. These results are consistent with recent experimental measurements of these power law exponents (S. Maslov, M. Mills, Physica A 299 (2001) 234 for β; P. Gopikrishnan et al., Phys. Rev. E 60 (1999) 5305 for γ).
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 299 (2001)
Issue (Month): 1 ()
|Contact details of provider:|| Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/|
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.:
- Sergei Maslov & Mark Mills, 2001. "Price fluctuations from the order book perspective - empirical facts and a simple model," Papers cond-mat/0102518, arXiv.org.
- Sorin Solomon and Peter Richmond, 2001.
"Stability of Pareto-Zipf Law in Non-Stationary Economies,"
Computing in Economics and Finance 2001
11, Society for Computational Economics.
- Sorin Solomon & Peter Richmond, 2000. "Stability of Pareto-Zipf Law in Non-Stationary Economies," Papers cond-mat/0012479, arXiv.org, revised Jan 2001.
- Levy, Moshe & Solomon, Sorin, 1997. "New evidence for the power-law distribution of wealth," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 242(1), pages 90-94.
- Maslov, Sergei & Mills, Mark, 2001. "Price fluctuations from the order book perspective—empirical facts and a simple model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 299(1), pages 234-246.
- Parameswaran Gopikrishnan & Vasiliki Plerou & Xavier Gabaix & H. Eugene Stanley, 2000. "Statistical Properties of Share Volume Traded in Financial Markets," Papers cond-mat/0008113, arXiv.org.
- Zhi-Feng Huang & Sorin Solomon, 2000.
"Power, Levy, Exponential and Gaussian Regimes in Autocatalytic Financial Systems,"
- Zhi-Feng Huang, Sorin Solomon*, 2001. "Power, Levy, Exponential and Gaussian Regimes in Autocatalytic Financial Systems," Computing in Economics and Finance 2001 12, Society for Computational Economics.
When requesting a correction, please mention this item's handle: RePEc:eee:phsmap:v:299:y:2001:i:1:p:188-197. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Shamier, Wendy)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.