Electrodynamical model of quasi-efficient financial market
The modelling of financial markets presents a problem which is both theoretically challenging and practically important. The theoretical aspects concern the issue of market efficiency which may even have political implications, whilst the practical side of the problem has clear relevance to portfolio management and derivative pricing. Up till now all market models contain ``smart money" traders and ``noise" traders whose joint activity constitutes the market. On a short time scale this traditional separation does not seem to be realistic, and is hardly acceptable since all high-frequency market participants are professional traders and cannot be separated into ``smart" and ``noisy". In this paper we present a ``microscopic" model with homogenuous quasi- rational behaviour of traders, aiming to describe short time market behaviour. To construct the model we use an analogy between ``screening" in quantum electrodynamics and an equilibration process in a market with temporal mispricing. As a result, we obtain the time-dependent distribution function of the returns which is in quantitative agreement with real market data and obeys the anomalous scaling relations recently reported for both high-frequency exchange rates, S\&P500 and other stock market indices.
|Date of creation:||03 Jun 1998|
|Date of revision:|
|Note:||Type of Document - Postscript file; prepared on UNIX Sparc TeX; to print on HP/PostScript; pages: 9 ; figures: two figures included|
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- Kirill Ilinski, 1997. "Physics of Finance," Papers hep-th/9710148, arXiv.org.
- P. Bak & M. Paczuski & M. Shubik, 1996.
"Price Variations in a Stock Market with Many Agents,"
96-09-075, Santa Fe Institute.
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- P. Bak & M. Paczuski & Martin Shubik, 1996. "Price Variations in a Stock Market with Many Agents," Cowles Foundation Discussion Papers 1132, Cowles Foundation for Research in Economics, Yale University.
- J. Bradford De Long & Andrei Shleifer & Lawrence H. Summers & Robert J. Waldmann, .
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J. Bradford De Long's Working Papers
_124, University of California at Berkeley, Economics Department.
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