Application of Zhangs square root law and herding to financial markets

Friedrich Wagner

Physica A: Statistical Mechanics and its Applications, 2006, vol. 364, issue C, 369-384

Abstract: We apply an asymmetric version of Kirman's herding model to volatile financial markets. In the relation between returns and agent concentration we use the square root law proposed by Zhang. This can be derived by extending the idea of a critical mean field theory suggested by Plerou et al. We show that this model is equivalent to the so called 32 model of stochastic volatility. The description of the unconditional distribution for the absolute returns is in good agreement with the DAX independent whether one uses the square root or a conventional linear relation. Only the statistic of extreme events prefers the former. The description of the autocorrelations are in much better agreement for the square root law. The volatility clusters are described by a scaling law for the distribution of returns conditional to the value at the previous day in good agreement with the data.

Keywords: Econophysics; Financial market; Volatility; Stochastic processes (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437105010290
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:364:y:2006:i:c:p:369-384

DOI: 10.1016/j.physa.2005.09.070

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().