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Simple stochastic modeling for fat tails in financial markets

In: Practical Fruits of Econophysics

Author

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  • Hans-Georg Matuttis

    (The University of Electro-Communications)

Abstract

3 Summary are Conclusions We have shown that the return distributions observed in the S&P500 can be obtained for a random-walk which reacts to moving averages in the technical analysis sense. Characteristic ingredients are mini-trends in accordance with moving averages, which lead to fat tails, delay in trading, which shifts the tails lower in the distributions and a reaction to break-outs of the market (in our case, Bollinger bands) which straighten out the curvature of the tails. Though the chart values of the S&P500 are not Gaussian distributed, it is the minitrends which follow a random walk/ Gaussian distribution with unit variance. This leaves considerable doubts about the actual “efficiency” of the market. It will be interesting to analyze other market data whether the local correlation a is universal, the mini-trends ηi are always standard-normal-distributed and whether the delay D is shorter in markets with electronic trading.

Suggested Citation

  • Hans-Georg Matuttis, 2006. "Simple stochastic modeling for fat tails in financial markets," Springer Books, in: Hideki Takayasu (ed.), Practical Fruits of Econophysics, pages 178-182, Springer.
    • Handle: RePEc:spr:sprchp:978-4-431-28915-9_32
    DOI: 10.1007/4-431-28915-1_32
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