Fluctuations and response in financial markets: the subtle nature of `random' price changes

Jean-Philippe Bouchaud, Yuval Gefen, Marc Potters and Matthieu Wyart
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Jean-Philippe Bouchaud: Science & Finance, Capital Fund Management
Yuval Gefen: Weizmann Institute
Marc Potters: Science & Finance, Capital Fund Management
Matthieu Wyart: CEA Saclay;

No 307332, Science & Finance (CFM) working paper archive from Science & Finance, Capital Fund Management

Abstract: Using Trades and Quotes data from the Paris stock market, we show that the random walk nature of traded prices results from a very delicate interplay between two opposite tendencies: strongly correlated market orders that lead to super-diffusion (or persistence), and mean reverting limit orders that lead to sub-diffusion (or anti-persistence). We define and study a model where the price, at any instant, is the result of the impact of all past trades, mediated by a non constant `propagator' in time that describes the response of the market to a single trade. Within this model, the market is shown to be, in a precise sense, at a critical point, where the price is purely diffusive and the average response function almost constant. We find empirically, and discuss theoretically, a fluctuation-response relation. We discuss the information content of each trade, and find that it is on average very small.

JEL-codes: G10 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin
Date: 2003-07
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Published in Quantitative Finance 4 (April 2004) 176-190

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Persistent link: http://EconPapers.repec.org/RePEc:sfi:sfiwpa:0307332

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