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

  • Jean-Philippe Bouchaud

    (CEA, CFM)

  • Yuval Gefen

    (Weizmann)

  • Marc Potters

    (CFM)

  • Matthieu Wyart

    (CEA)

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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File URL: http://arxiv.org/pdf/cond-mat/0307332
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Paper provided by arXiv.org in its series Papers with number cond-mat/0307332.

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Date of creation: Jul 2003
Date of revision: Aug 2003
Publication status: Published in Quantitative Finance 4 (April 2004) 176-190
Handle: RePEc:arx:papers:cond-mat/0307332
Contact details of provider: Web page: http://arxiv.org/

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  17. Frantisek Slanina, 2001. "Mean-field approximation for a limit order driven market model," Papers cond-mat/0104547, arXiv.org, revised Aug 2001.
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