Queueing Theoretic Approaches to Financial Price Fluctuations
One approach to the analysis of stochastic fluctuations in market prices is to model characteristics of investor behaviour and the complex interactions between market participants, with the aim of extracting consequences in the aggregate. This agent-based viewpoint in finance goes back at least to the work of Garman (1976) and shares the philosophy of statistical mechanics in the physical sciences. We discuss recent developments in market microstructure models. They are capable, often through numerical simulations, to explain many stylized facts like the emergence of herding behavior, volatility clustering and fat tailed returns distributions. They are typically queueing-type models, that is, models of order flows, in contrast to classical economic equilibrium theories of utility-maximizing, rational, ``representative'' investors. Mathematically, they are analyzed using tools of functional central limit theorems, strong approximations and weak convergence. Our main examples focus on investor inertia, a trait that is well-documented, among other behavioral qualities, and modelled using semi-Markov switching processes. In particular, we show how inertia may lead to the phenomenon of long-range dependence in stock prices.
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Frankel, Jeffrey A & Froot, Kenneth A, 1987.
"Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations,"
American Economic Review,
American Economic Association, vol. 77(1), pages 133-53, March.
- Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Brad M. Barber & Terrance Odean, 2001. "The Internet and the Investor," Journal of Economic Perspectives, American Economic Association, vol. 15(1), pages 41-54, Winter.
- Hans Föllmer & Martin Schweizer, 1993. "A Microeconomic Approach to Diffusion Models For Stock Prices," Mathematical Finance, Wiley Blackwell, vol. 3(1), pages 1-23.
- Volker Bohm & Carl Chiarella, 2000.
"Mean Variance Preferences, Expectations Formation, and the Dynamics of Random Asset Prices,"
Research Paper Series
46, Quantitative Finance Research Centre, University of Technology, Sydney.
- Volker Böhm & Carl Chiarella, 2005. "Mean Variance Preferences, Expectations Formation, And The Dynamics Of Random Asset Prices," Mathematical Finance, Wiley Blackwell, vol. 15(1), pages 61-97.
- Volker Böhm & Nicole Deutscher & Jan Wenzelburger, 2000. "Endogenous Random Asset Prices in Overlapping Generations Economies," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 23-38.
- Erhan Bayraktar & H. Vincent Poor & Ronnie Sircar, 2007. "Estimating the Fractal Dimension of the S&P 500 Index using Wavelet Analysis," Papers math/0703834, arXiv.org.
- Garman, Mark B., 1976. "Market microstructure," Journal of Financial Economics, Elsevier, vol. 3(3), pages 257-275, June.
- Brigitte C. Madrian & Dennis F. Shea, 2001. "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," The Quarterly Journal of Economics, Oxford University Press, vol. 116(4), pages 1149-1187.
- Umut Çetin & Robert Jarrow & Philip Protter, 2004. "Liquidity risk and arbitrage pricing theory," Finance and Stochastics, Springer, vol. 8(3), pages 311-341, 08.
- E. Platen & M. Schweizer, 1997.
"On Feedback Effects from Hedging Derivatives,"
SFB 373 Discussion Papers
1997,83, Humboldt University of Berlin, Interdisciplinary Research Project 373: Quantification and Simulation of Economic Processes.
- Xue-Zhong (Tony) He & Carl Chiarella, 2001.
"Asset Price and Wealth Dynamics under Heterogeneous Expectations,"
CeNDEF Workshop Papers, January 2001
5A.2, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
- C. Chiarella & X-Z. He, 2001. "Asset price and wealth dynamics under heterogeneous expectations," Quantitative Finance, Taylor & Francis Journals, vol. 1(5), pages 509-526.
- Carl Chiarella & Xue-Zhong He, 2001. "Asset Price and Wealth Dynamics Under Heterogeneous Expectations," Research Paper Series 56, Quantitative Finance Research Centre, University of Technology, Sydney.
- Brock, William A. & Hommes, Cars H., 1998.
"Heterogeneous beliefs and routes to chaos in a simple asset pricing model,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 22(8-9), pages 1235-1274, August.
- Ding, Zhuanxin & Granger, Clive W. J. & Engle, Robert F., 1993. "A long memory property of stock market returns and a new model," Journal of Empirical Finance, Elsevier, vol. 1(1), pages 83-106, June.
- Bohm, Volker & Wenzelburger, Jan, 2005.
"On the performance of efficient portfolios,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 29(4), pages 721-740, April.
- Hugh Luckock, 2003. "A steady-state model of the continuous double auction," Quantitative Finance, Taylor & Francis Journals, vol. 3(5), pages 385-404.
- Wenzelburger, Jan, 2004. "Learning to predict rationally when beliefs are heterogeneous," Journal of Economic Dynamics and Control, Elsevier, vol. 28(10), pages 2075-2104, September.
- Erhan Çinlar, 1975. "Exceptional Paper--Markov Renewal Theory: A Survey," Management Science, INFORMS, vol. 21(7), pages 727-752, March.
- Kahneman, Daniel & Tversky, Amos, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Econometric Society, vol. 47(2), pages 263-91, March.
- Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
- Lux, Thomas, 1998. "The socio-economic dynamics of speculative markets: interacting agents, chaos, and the fat tails of return distributions," Journal of Economic Behavior & Organization, Elsevier, vol. 33(2), pages 143-165, January.
- Erhan Bayraktar & H. Vincent Poor, 2005. "Arbitrage In Fractal Modulated Black–Scholes Models When The Volatility Is Stochastic," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(03), pages 283-300.
- Alan P. Kirman, 1992. "Whom or What Does the Representative Individual Represent?," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 117-136, Spring.
- repec:att:wimass:9530 is not listed on IDEAS
- Erhan Bayraktar & Ulrich Horst & Ronnie Sircar, 2007. "A Limit Theorem for Financial Markets with Inert Investors," Papers math/0703831, arXiv.org.
- Alvaro Sandroni, 2000. "Do Markets Favor Agents Able to Make Accurate Predicitions?," Econometrica, Econometric Society, vol. 68(6), pages 1303-1342, November.
- Mattias Jonsson & Jussi Keppo, 2002. "Option pricing for large agents," Applied Mathematical Finance, Taylor & Francis Journals, vol. 9(4), pages 261-272.
- Brock, W.A. & Hommes, C.H., 1996.
"A Rational Route to Randomness,"
9530r, Wisconsin Madison - Social Systems.
- Potscher, Benedikt M & Prucha, Ingmar R, 1989.
"A Uniform Law of Large Numbers for Dependent and Heterogeneous Data Processes,"
Econometric Society, vol. 57(3), pages 675-83, May.
- Potscher, Benedikt M. & Prucha, Ingmar R., 1987. "A Uniform Law of Large Numbers for Dependent and Heterogeneous Data Process," Working Papers 87-26, C.V. Starr Center for Applied Economics, New York University.
- Kraus, Alan & Stoll, Hans R, 1972. "Price Impacts of Block Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 27(3), pages 569-88, June.
- Sergio Bianchi, 2005. "Pathwise Identification Of The Memory Function Of Multifractional Brownian Motion With Application To Finance," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 8(02), pages 255-281.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- J. Doyne Farmer & Paolo Patelli & Ilija I. Zovko, 2003. "The Predictive Power of Zero Intelligence in Financial Markets," Papers cond-mat/0309233, arXiv.org, revised Feb 2004.
- Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
- Taylor, Mark P. & Allen, Helen, 1992. "The use of technical analysis in the foreign exchange market," Journal of International Money and Finance, Elsevier, vol. 11(3), pages 304-314, June.
- Lux, Thomas, 1995. "Herd Behaviour, Bubbles and Crashes," Economic Journal, Royal Economic Society, vol. 105(431), pages 881-96, July.
- Lux, Thomas, 1997. "Time variation of second moments from a noise trader/infection model," Journal of Economic Dynamics and Control, Elsevier, vol. 22(1), pages 1-38, November.
When requesting a correction, please mention this item's handle: RePEc:arx:papers:math/0703832. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (arXiv administrators)
If references are entirely missing, you can add them using this form.