Long Range Interaction Generating Fat-Tails in Finance

Marco Airoldi, Vito Antonelli, Bruno Bassetti, Andrea Martinelli and Marco Picariello ()
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Marco Airoldi: MedioBanca
Vito Antonelli: Universita' degli Studi di Milano & INFN Milano
Bruno Bassetti: Universita' degli Studi di Milano & INFN Milano
Andrea Martinelli: Banca Intesa

GE, Growth, Math methods from EconWPA

Abstract: It's commonly known that the correlation between stocks increases during market turbulent periods. In this work we propose a modellization of this feature, viewed as a collective effect, rearranging a toy-model first proposed in 2001. Equities are modelled as quasi random walk variables, where the non-Brownian components of stocks movement are linked to the market trend via a long range interaction function. Our model generates fat tails for stock probability distributions and implied volatility surfaces analogous to real data, suggesting an unitary picture of long range interaction, fat tails and volatility smiles.

Keywords: Mathematical models; quantitative finance; interactions and correlations (search for similar items in EconPapers)
JEL-codes: C60 C61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-fin and nep-fmk
Date: 2004-04-27, Revised 2004-04-27
Note: Type of Document - tar.gz; pages: 13. 13 pages, latex, 7 figures
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpge:0404006

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