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Fluctuations and response in financial markets: the subtle nature of 'random' price changes

  • Jean-Philippe Bouchaud
  • Yuval Gefen
  • Marc Potters
  • Matthieu Wyart
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    Using trades and quotes data from the Paris stock market, we show that the random walk nature of traded prices results from a very delicate interplay between two opposite tendencies: long-range correlated market orders that lead to super-diffusion (or persistence), and mean reverting limit orders that lead to sub-diffusion (or anti-persistence). We define and study a model where the price, at any instant, is the result of the impact of all past trades, mediated by a non-constant 'propagator' in time that describes the response of the market to a single trade. Within this model, the market is shown to be, in a precise sense, at a critical point, where the price is purely diffusive and the average response function almost constant. We find empirically, and discuss theoretically, a fluctuation-response relation. We also discuss the fraction of truly informed market orders, that correctly anticipate short-term moves, and find that it is quite small.

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    Article provided by Taylor & Francis Journals in its journal Quantitative Finance.

    Volume (Year): 4 (2004)
    Issue (Month): 2 ()
    Pages: 176-190

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    Handle: RePEc:taf:quantf:v:4:y:2004:i:2:p:176-190
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