A dynamical model describing stock market price distributions

Jaume Masoliver, Miquel Montero () and Josep M Porrà

Physica A: Statistical Mechanics and its Applications, 2000, vol. 283, issue 3, 559-567

Abstract: High-frequency data in finance have led to a deeper understanding on probability distributions of market prices. Several facts seem to be well established by empirical evidence. Specifically, probability distributions have the following properties: (i) They are not Gaussian and their center is well adjusted by Lévy distributions. (ii) They are long-tailed but have finite moments of any order. (iii) They are self-similar on many time scales. Finally, (iv) at small time scales, price volatility follows a non-diffusive behavior. We extend Merton's ideas on speculative price formation and present a dynamical model resulting in a characteristic function that explains in a natural way all of the above features. The knowledge of such a distribution opens a new and useful way of quantifying financial risk. The results of the model agree – with high degree of accuracy – with empirical data taken from historical records of the Standard & Poor's 500 cash index.

Keywords: Price dynamics; Shot noise; Leptokurtic distributions; Anomalous diffusion (search for similar items in EconPapers)
Date: 2000
References: View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437100001175
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:
Working Paper: A dynamical model describing stock market price distributions (2000)
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:283:y:2000:i:3:p:559-567

DOI: 10.1016/S0378-4371(00)00117-5

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 ().