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Coupled continuous time random walks in finance

  • Meerschaert, Mark M.
  • Scalas, Enrico

Continuous time random walks (CTRWs) are used in physics to model anomalous diffusion, by incorporating a random waiting time between particle jumps. In finance, the particle jumps are log-returns and the waiting times measure delay between transactions. These two random variables (log-return and waiting time) are typically not independent. For these coupled CTRW models, we can now compute the limiting stochastic process (just like Brownian motion is the limit of a simple random walk), even in the case of heavy-tailed (power-law) price jumps and/or waiting times. The probability density functions for this limit process solve fractional partial differential equations. In some cases, these equations can be explicitly solved to yield descriptions of long-term price changes, based on a high-resolution model of individual trades that includes the statistical dependence between waiting times and the subsequent log-returns. In the heavy-tailed case, this involves operator stable space–time random vectors that generalize the familiar stable models. In this paper, we will review the fundamental theory and present two applications with tick-by-tick stock and futures data.

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Article provided by Elsevier in its journal Physica A: Statistical Mechanics and its Applications.

Volume (Year): 370 (2006)
Issue (Month): 1 ()
Pages: 114-118

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Handle: RePEc:eee:phsmap:v:370:y:2006:i:1:p:114-118
Contact details of provider: Web page: http://www.journals.elsevier.com/physica-a-statistical-mechpplications/

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  1. Francesco Mainardi & Marco Raberto & Rudolf Gorenflo & Enrico Scalas, 2000. "Fractional calculus and continuous-time finance II: the waiting-time distribution," Papers cond-mat/0006454, arXiv.org, revised Nov 2000.
  2. Bertram, William K, 2004. "An empirical investigation of Australian Stock Exchange data," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 341(C), pages 533-546.
  3. Enrico Scalas & Rudolf Gorenflo & Francesco Mainardi, 2004. "Fractional calculus and continuous-time finance," Finance 0411007, EconWPA.
  4. Scheffler, Hans-Peter, 1999. "On estimation of the spectral measure of certain nonnormal operator stable laws," Statistics & Probability Letters, Elsevier, vol. 43(4), pages 385-392, July.
  5. Raberto, Marco & Scalas, Enrico & Mainardi, Francesco, 2002. "Waiting-times and returns in high-frequency financial data: an empirical study," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 314(1), pages 749-755.
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