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Applications of physics to economics and finance: Money, income, wealth, and the stock market

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  • Adrian A. Dragulescu

Abstract

Several problems arising in Economics and Finance are analyzed using concepts and quantitative methods from Physics. Here is the abridged abstact: Chapter 1: By analogy with energy, the equilibrium probability distribution of money must follow the exponential Boltzmann-Gibbs law characterized by an effective temperature equal to the average amount of money per economic agent. A thermal machine which extracts a monetary profit can be constructed between two economic systems with different temperatures. Chapter 2: Using data from several sources, it is found that the distribution of income is described for the great majority of population by an exponential distribution, whereas the high-end tail follows a power law. The Lorenz curve and Gini coefficient were calculated and are shown to be in good agreement with both income and wealth data sets. Chapter 3: The Heston model where stock-price dynamics is governed by a geometrical (multiplicative) Brownian motion with stochastic variance is studied. The corresponding Fokker-Planck equation is solved exactly. Integrating out the variance, an analytic formula for the time-dependent probability distribution of stock price changes (returns) is found. The formula is in excellent agreement with the Dow-Jones index for the time lags from 1 to 250 trading days.

Suggested Citation

  • Adrian A. Dragulescu, 2003. "Applications of physics to economics and finance: Money, income, wealth, and the stock market," Papers cond-mat/0307341, arXiv.org, revised Jul 2003.
  • Handle: RePEc:arx:papers:cond-mat/0307341
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    Cited by:

    1. Wright, Ian, 2009. "Implicit Microfoundations for Macroeconomics," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 3, pages 1-27.
    2. Wright, Ian, 2005. "The social architecture of capitalism," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 346(3), pages 589-620.
    3. Elvis Oltean, 2016. "Modelling income, wealth, and expenditure data by use of Econophysics," Papers 1603.08383, arXiv.org.
    4. Diniz, M. & Mendes, F.M., 2012. "Effects of taxation on money distribution," International Review of Financial Analysis, Elsevier, vol. 23(C), pages 81-85.
    5. Fabio Clementi & Mauro Gallegati, 2005. "Pareto's Law of Income Distribution: Evidence for Grermany, the United Kingdom, and the United States," Microeconomics 0505006, EconWPA.

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