Financial market dynamics

    Authors

    F. Michael;M. D. Johnson

    Comments

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    Abbreviated Journal Title

    Physica A

    Keywords

    econophysics; finance; nonextensive statistics; stochastic processes; FOKKER-PLANCK EQUATION; STATISTICAL-MECHANICS; SPIN MODEL; DIFFUSION; Physics, Multidisciplinary

    Abstract

    A necessary precondition for modeling financial markets is a complete understanding of their statistics, including dynamics. Distributions derived from nonextensive Tsallis statistics are closely connected with dynamics described by a nonlinear Fokker-Planck equation. The combination shows promise in describing stochastic processes with power-law distributions and superdiffusive dynamics. We investigate intra-day price changes in the S&P500 stock index within this framework. We find that the power-law tails of the distributions, and the index's anomalously diffusing dynamics, are very accurately described by this approach. Our results show good agreement between market data and Fokker-Planck dynamics. This approach may be applicable in any anomalously diffusing system in which the correlations in time can be accounted for by an Ito-Langevin process with a simple time-dependent diffusion coefficient. (C) 2002 Elsevier Science B.V. All rights reserved.

    Journal Title

    Physica a-Statistical Mechanics and Its Applications

    Volume

    320

    Publication Date

    1-1-2003

    Document Type

    Article

    Language

    English

    First Page

    525

    Last Page

    534

    WOS Identifier

    WOS:000181375800043

    ISSN

    0378-4371

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