Variable diffusion in stock market fluctuations

Jia-Chen Hua, Lijian Chen, Liberty Falcon, Joseph L. McCauley and Gemunu H. Gunaratne

Physica A: Statistical Mechanics and its Applications, 2015, vol. 419, issue C, 221-233

Abstract: We analyze intraday fluctuations in several stock indices to investigate the underlying stochastic processes using techniques appropriate for processes with nonstationary increments. The five most actively traded stocks each contains two time intervals during the day where the variance of increments can be fit by power law scaling in time. The fluctuations in return within these intervals follow asymptotic bi-exponential distributions. The autocorrelation function for increments vanishes rapidly, but decays slowly for absolute and squared increments. Based on these results, we propose an intraday stochastic model with linear variable diffusion coefficient as a lowest order approximation to the real dynamics of financial markets, and to test the effects of time averaging techniques typically used for financial time series analysis. We find that our model replicates major stylized facts associated with empirical financial time series. We also find that ensemble averaging techniques can be used to identify the underlying dynamics correctly, whereas time averages fail in this task. Our work indicates that ensemble average approaches will yield new insight into the study of financial markets’ dynamics. Our proposed model also provides new insight into the modeling of financial markets dynamics in microscopic time scales.

Keywords: Econophysics; Variable diffusion; Stock markets; Order book (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:419:y:2015:i:c:p:221-233

DOI: 10.1016/j.physa.2014.10.024

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