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Quantifying Stock Price Response to Demand Fluctuations

Listed author(s):
  • Vasiliki Plerou
  • Parameswaran Gopikrishnan
  • Xavier Gabaix
  • H. Eugene Stanley

We address the question of how stock prices respond to changes in demand. We quantify the relations between price change $G$ over a time interval $\Delta t$ and two different measures of demand fluctuations: (a) $\Phi$, defined as the difference between the number of buyer-initiated and seller-initiated trades, and (b) $\Omega$, defined as the difference in number of shares traded in buyer and seller initiated trades. We find that the conditional expectations $ _{\Omega}$ and $ _{\Phi}$ of price change for a given $\Omega$ or $\Phi$ are both concave. We find that large price fluctuations occur when demand is very small --- a fact which is reminiscent of large fluctuations that occur at critical points in spin systems, where the divergent nature of the response function leads to large fluctuations.

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Paper provided by in its series Papers with number cond-mat/0106657.

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Date of creation: Jun 2001
Handle: RePEc:arx:papers:cond-mat/0106657
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