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The canonical econophysics approach to the flash crash of May 6, 2010

Author

Listed:
  • Mazzeu, Joao
  • Otuki, Thiago
  • Da Silva, Sergio

Abstract

We carry out a statistical physics analysis of the flash crash of May 6, 2010 using data from the Dow Jones Industrial Average index sampled at a one-minute frequency from September 1, 2009 to May 31, 2010. We evaluate the hypothesis of a non-Gaussian Levy-stable distribution to model the data and pay particular attention to the distribution-tail behavior. We conclude that there is non-Gaussian scaling and thus that the flash crash cannot be considered an anomaly. From the study of tails, we find that the flash crash followed a power-law pattern outside the Levy regime, which was not the inverse cubic law. Finally, we show that the time-dependent variance of the DJIA-index returns, not tracked by the Levy, can be modeled in a straightforward manner by a GARCH (1, 1) process.

Suggested Citation

  • Mazzeu, Joao & Otuki, Thiago & Da Silva, Sergio, 2011. "The canonical econophysics approach to the flash crash of May 6, 2010," MPRA Paper 29138, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:29138
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    File URL: https://mpra.ub.uni-muenchen.de/29138/1/MPRA_paper_29138.pdf
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    References listed on IDEAS

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    1. Benoit B. Mandelbrot, 2005. "Parallel cartoons of fractal models of finance," Annals of Finance, Springer, vol. 1(2), pages 179-192, October.
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    Cited by:

    1. Da Silva, Sergio, 2014. "Why Not Use Robots to Stabilize Stock Markets?," MPRA Paper 60567, University Library of Munich, Germany.
    2. Demos, Guilherme & Da Silva, Sergio & Matsushita, Raul, 2015. "Some Statistical Properties of the Mini Flash Crashes," MPRA Paper 65473, University Library of Munich, Germany.

    More about this item

    Keywords

    flash crash; econophysics; stable distribution; extreme events;

    JEL classification:

    • C46 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Specific Distributions
    • G01 - Financial Economics - - General - - - Financial Crises

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