The canonical econophysics approach to the flash crash of May 6, 2010

Joao Mazzeu, Thiago Otuki and Sergio Da Silva

MPRA Paper from University Library of Munich, Germany

Abstract: We carry out a statistical physics analysis of the flash crash of May 6, 2010 using data from the Dow Jones Industrial Average index sampled at a one-minute frequency from September 1, 2009 to May 31, 2010. We evaluate the hypothesis of a non-Gaussian Levy-stable distribution to model the data and pay particular attention to the distribution-tail behavior. We conclude that there is non-Gaussian scaling and thus that the flash crash cannot be considered an anomaly. From the study of tails, we find that the flash crash followed a power-law pattern outside the Levy regime, which was not the inverse cubic law. Finally, we show that the time-dependent variance of the DJIA-index returns, not tracked by the Levy, can be modeled in a straightforward manner by a GARCH (1, 1) process.

Keywords: flash crash; econophysics; stable distribution; extreme events (search for similar items in EconPapers)
JEL-codes: C46 G01 (search for similar items in EconPapers)
Date: 2011
New Economics Papers: this item is included in nep-ecm, nep-hme and nep-rmg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published in Applied Mathematical Sciences 5.28(2011): pp. 1373-1389

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:29138

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