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Dynamical model of financial markets: fluctuating ‘temperature’ causes intermittent behavior of price changes

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  • Kozuki, Naoki
  • Fuchikami, Nobuko

Abstract

We present a model of financial markets originally proposed for a turbulent flow, as a dynamic basis of its intermittent behavior. Time evolution of the price change is assumed to be described by Brownian motion in a power-law potential, where the ‘temperature’ fluctuates slowly. The model generally yields a fat-tailed distribution of the price change. Specifically a Tsallis distribution is obtained if the inverse temperature is χ2-distributed, which qualitatively agrees with intraday data of foreign exchange market. The so-called ‘volatility’, a quantity indicating the risk or activity in financial markets, corresponds to the temperature of markets and its fluctuation leads to intermittency.

Suggested Citation

  • Kozuki, Naoki & Fuchikami, Nobuko, 2003. "Dynamical model of financial markets: fluctuating ‘temperature’ causes intermittent behavior of price changes," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 329(1), pages 222-230.
    • Handle: RePEc:eee:phsmap:v:329:y:2003:i:1:p:222-230
    DOI: 10.1016/S0378-4371(03)00592-2
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    Cited by:

    1. Christoph J. Borner & Ingo Hoffmann & John H. Stiebel, 2024. "A closer look at the chemical potential of an ideal agent system," Papers 2401.09233, arXiv.org.
    2. Christoph J. Borner & Ingo Hoffmann & John H. Stiebel, 2023. "On the Connection between Temperature and Volatility in Ideal Agent Systems," Papers 2303.15164, arXiv.org.
    3. Kozaki, M. & Sato, A.-H., 2008. "Application of the Beck model to stock markets: Value-at-Risk and portfolio risk assessment," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(5), pages 1225-1246.

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