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An Elementary Model of Price Dynamics in a Financial Market Distribution, Multiscaling & Entropy


  • Stefan Reimann


Stylized facts of empirical assets log-returns include the existence of semi heavy tailed distributions and a non-linear spectrum of Hurst exponents. Empirical data considered are daily prices from 10 large indices from 01/01/1990 to 12/31/2004. We propose a stylized model of price dynamics which is driven by expectations. The model is a multiplicative random process with a stochastic, state-dependent growth rate which establishes a negative feedback component in the price dynamics. This 0-order model implies that the distribution of log-returns is Laplacian, whose single parameter can be regarded as a measure for the long-time averaged liquidity in the respective market. A comparison with the (more general) Weibull distribution shows that empirical log returns are close to being Laplacian distributed. The spectra of Hurst exponents of both, empirical data and simulated data due to our model, are compared. Due to the finding of non-linear Hurst spectra, the Renyi entropy is considered. An explicit functional form of the RE for an exponential distribution is derived. Theoretical of simulated asset return trails are in good agreement with the estimated from empirical returns.

Suggested Citation

  • Stefan Reimann, 2006. "An Elementary Model of Price Dynamics in a Financial Market Distribution, Multiscaling & Entropy," IEW - Working Papers 271, Institute for Empirical Research in Economics - University of Zurich.
  • Handle: RePEc:zur:iewwpx:271

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    More about this item


    stylized facts; empirical asset returns; multiscaling; Renyi information;

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C5 - Mathematical and Quantitative Methods - - Econometric Modeling
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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