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Dynamical model of financial markets: fluctuating `temperature' causes intermittent behavior of price changes

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  • Naoki Kozuki
  • Nobuko Fuchikami

Abstract

We present a model of financial markets originally proposed for a turbulent flow, as a dynamic basis of its intermittent behavior. Time evolution of the price change is assumed to be described by Brownian motion in a power-law potential, where the `temperature' fluctuates slowly. The model generally yields a fat-tailed distribution of the price change. Specifically a Tsallis distribution is obtained if the inverse temperature is $\chi^{2}$-distributed, which qualitatively agrees with intraday data of foreign exchange market. The so-called `volatility', a quantity indicating the risk or activity in financial markets, corresponds to the temperature of markets and its fluctuation leads to intermittency.

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  • Naoki Kozuki & Nobuko Fuchikami, 2002. "Dynamical model of financial markets: fluctuating `temperature' causes intermittent behavior of price changes," Papers cond-mat/0210090, arXiv.org.
    • Handle: RePEc:arx:papers:cond-mat/0210090
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    Cited by:

    1. K. Ivanova & M. Ausloos & H. Takayasu, 2003. "Deterministic and stochastic influences on Japan and US stock and foreign exchange markets. A Fokker-Planck approach," Papers cond-mat/0301268, arXiv.org.

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