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Dynamics on/in financial markets: dynamical decoupling and stylized facts


  • Stefan Reimann
  • Andreas Tupak


Stylized facts can be regarded as constraints for any modeling attempt of price dynamics on a financial market, in that an empirically reasonable model has to reproduce these stylized facts at least qualitatively. The dynamics of market prices is modeled on a macro-level as the result of the dynamic coupling of two dynamical components. The degree of their dynamical decoupling is shown to have a significant impact on the stochastic properties of return trials such as the return distribution, volatility clustering, and the multifractal behavior of time scales of asset returns. Particularly we observe a cross over in the return distribution from a Gaussian-like to a Levy-like shape when the degree of decoupling increases. In parallel, the larger the degree of decoupling is the more pronounced is volatility clustering. These findings suggest that the considerations of time in an economic system, in general, and the coupling of constituting processes is essential for understanding the behavior of a financial market.

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  • Stefan Reimann & Andreas Tupak, 2010. "Dynamics on/in financial markets: dynamical decoupling and stylized facts," Papers 1004.1522,
  • Handle: RePEc:arx:papers:1004.1522

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    1. Alessandra Cretarola & Fausto Gozzi & Huyên Pham & Peter Tankov, 2011. "Optimal consumption policies in illiquid markets," Finance and Stochastics, Springer, vol. 15(1), pages 85-115, January.
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    5. Huyên Pham & Peter Tankov, 2008. "A Model Of Optimal Consumption Under Liquidity Risk With Random Trading Times," Mathematical Finance, Wiley Blackwell, vol. 18(4), pages 613-627.
    6. Luz Rocío Sotomayor & Abel Cadenillas, 2009. "Explicit Solutions Of Consumption-Investment Problems In Financial Markets With Regime Switching," Mathematical Finance, Wiley Blackwell, vol. 19(2), pages 251-279.
    7. L.C.G. Rogers, 2001. "The relaxed investor and parameter uncertainty," Finance and Stochastics, Springer, vol. 5(2), pages 131-154.
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