Dynamical model of financial markets: fluctuating ‘temperature’ causes intermittent behavior of price changes

Naoki Kozuki and Nobuko Fuchikami

Physica A: Statistical Mechanics and its Applications, 2003, vol. 329, issue 1, 222-230

Abstract: We present a model of financial markets originally proposed for a turbulent flow, as a dynamic basis of its intermittent behavior. Time evolution of the price change is assumed to be described by Brownian motion in a power-law potential, where the ‘temperature’ fluctuates slowly. The model generally yields a fat-tailed distribution of the price change. Specifically a Tsallis distribution is obtained if the inverse temperature is χ2-distributed, which qualitatively agrees with intraday data of foreign exchange market. The so-called ‘volatility’, a quantity indicating the risk or activity in financial markets, corresponds to the temperature of markets and its fluctuation leads to intermittency.

Keywords: Foreign exchange market; Volatility; Tsallis distribution; χ2-distribution; Brownian motion (search for similar items in EconPapers)
Date: 2003
References: View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437103005922
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:329:y:2003:i:1:p:222-230

DOI: 10.1016/S0378-4371(03)00592-2

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 ().