Multiplicative point process as a model of trading activity

V. Gontis and B. Kaulakys

Physica A: Statistical Mechanics and its Applications, 2004, vol. 343, issue C, 505-514

Abstract: Signals consisting of a sequence of pulses show that inherent origin of the 1/f noise is a Brownian fluctuation of the average interevent time between subsequent pulses of the pulse sequence. In this paper, we generalize the model of interevent time to reproduce a variety of self-affine time series exhibiting power spectral density S(f) scaling as a power of the frequency f. Furthermore, we analyze the relation between the power-law correlations and the origin of the power-law probability distribution of the signal intensity. We introduce a stochastic multiplicative model for the time intervals between point events and analyze the statistical properties of the signal analytically and numerically. Such model system exhibits power-law spectral density S(f)∼1/fβ for various values of β, including β=12, 1 and 32. Explicit expressions for the power spectra in the low-frequency limit and for the distribution density of the interevent time are obtained. The counting statistics of the events is analyzed analytically and numerically, as well. The specific interest of our analysis is related with the financial markets, where long-range correlations of price fluctuations largely depend on the number of transactions. We analyze the spectral density and counting statistics of the number of transactions. The model reproduces spectral properties of the real markets and explains the mechanism of power-law distribution of trading activity. The study provides evidence that the statistical properties of the financial markets are enclosed in the statistics of the time interval between trades. A multiplicative point process serves as a consistent model generating this statistics.

Keywords: Stochastic processes; Econophysics; Financial markets; Point processes; 1/f noise (search for similar items in EconPapers)
Date: 2004
References: View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:343:y:2004:i:c:p:505-514

DOI: 10.1016/j.physa.2004.05.080

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