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Econophysics: A challenge to econometricians

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  • Zapart, Christopher A.

Abstract

The study contrasts mainstream economics–operating on time scales of hours and days–with behavioural finance, econophysics and high-frequency trading, more applicable to short-term time scales of the order of minutes and seconds. We show how the central theoretical assumption underpinning prevailing economic theories is violated on small time scales. We also demonstrate how an alternative behavioural econophysics can model reactions of market participants to short-term movements in foreign exchange markets and, in a direct contradiction of the orthodox economics, design a rudimentary IsingFX automated trading system.

Suggested Citation

  • Zapart, Christopher A., 2015. "Econophysics: A challenge to econometricians," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 419(C), pages 318-327.
  • Handle: RePEc:eee:phsmap:v:419:y:2015:i:c:p:318-327
    DOI: 10.1016/j.physa.2014.10.013
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    References listed on IDEAS

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    1. Summers, Lawrence H, 1986. "Does the Stock Market Rationally Reflect Fundamental Values?," Journal of Finance, American Finance Association, vol. 41(3), pages 591-601, July.
    2. McCauley, Joseph L., 2003. "Thermodynamic analogies in economics and finance: instability of markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 329(1), pages 199-212.
    3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
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    5. Yuko Hashimoto & Takatoshi Ito & Takaaki Ohnishi & Misako Takayasu & Hideki Takayasu & Tsutomu Watanabe, 2012. "Random walk or a run. Market microstructure analysis of foreign exchange rate movements based on conditional probability," Quantitative Finance, Taylor & Francis Journals, vol. 12(6), pages 893-905, March.
    6. McCauley,Joseph L., 2013. "Stochastic Calculus and Differential Equations for Physics and Finance," Cambridge Books, Cambridge University Press, number 9780521763400, December.
    7. Black, Fischer, 1986. "Noise," Journal of Finance, American Finance Association, vol. 41(3), pages 529-543, July.
    8. D. Sornette, 2014. "Physics and Financial Economics (1776-2014): Puzzles, Ising and Agent-Based models," Papers 1404.0243, arXiv.org.
    9. Lawrence H. Summers, 1982. "Do We Really Know That Financial Markets Are Efficient?," NBER Working Papers 0994, National Bureau of Economic Research, Inc.
    10. McCauley, Joseph l., 2004. "Thermodynamic analogies in economics and finance: instability of markets," MPRA Paper 2159, University Library of Munich, Germany.
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    Citations

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    Cited by:

    1. Pirvu Daniela & Barbuceanu Mircea, 2016. "Recent Contributions Of The Statistical Physics In The Research Of Banking, Stock Exchange And Foreign Exchange Markets," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 2, pages 85-92, April.
    2. García-Carranco, Sergio M. & Bory-Reyes, Juan & Balankin, Alexander S., 2016. "The crude oil price bubbling and universal scaling dynamics of price volatility," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 452(C), pages 60-68.
    3. Paweł Fiedor, 2015. "Multiscale Analysis of the Predictability of Stock Returns," Risks, MDPI, Open Access Journal, vol. 3(2), pages 1-15, June.

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