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Trading leads to scale-free self-organization

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  • Ebert, M.
  • Paul, W.

Abstract

Financial markets display scale-free behavior in many different aspects. The power-law behavior of part of the distribution of individual wealth has been recognized by Pareto as early as the nineteenth century. Heavy-tailed and scale-free behavior of the distribution of returns of different financial assets have been confirmed in a series of works. The existence of a Pareto-like distribution of the wealth of market participants has been connected with the scale-free distribution of trading volumes and price-returns. The origin of the Pareto-like wealth distribution, however, remained obscure. Here we show that in a market where the imbalance of supply and demand determines the direction of prize changes, it is the process of trading itself that spontaneously leads to a self-organization of the market with a Pareto-like wealth distribution for the market participants and at the same time to a scale-free behavior of return fluctuations and trading volume distributions.

Suggested Citation

  • Ebert, M. & Paul, W., 2012. "Trading leads to scale-free self-organization," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(23), pages 6033-6038.
    • Handle: RePEc:eee:phsmap:v:391:y:2012:i:23:p:6033-6038
    DOI: 10.1016/j.physa.2012.07.009
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    References listed on IDEAS

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    1. Levy, Haim & Levy, Moshe & Solomon, Sorin, 2000. "Microscopic Simulation of Financial Markets," Elsevier Monographs, Elsevier, edition 1, number 9780124458901.
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