Fluctuations and response in financial markets: the subtle nature of `random' price changes
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: strongly 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 discuss the information content of each trade, and find that it is on average very small.
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|Date of creation:||Jul 2003|
|Publication status:||Published in Quantitative Finance 4 (April 2004) 176-190|
|Contact details of provider:|| Postal: 6 boulevard Haussmann, 75009 Paris, FRANCE|
Web page: http://www.science-finance.fr/
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