How Volatilities Nonlocal in Time Affect the Price Dynamics in Complex Financial Systems

Lei Tan, Bo Zheng, Jun-Jie Chen and Xiong-Fei Jiang

PLOS ONE, 2015, vol. 10, issue 2, 1-16

Abstract: What is the dominating mechanism of the price dynamics in financial systems is of great interest to scientists. The problem whether and how volatilities affect the price movement draws much attention. Although many efforts have been made, it remains challenging. Physicists usually apply the concepts and methods in statistical physics, such as temporal correlation functions, to study financial dynamics. However, the usual volatility-return correlation function, which is local in time, typically fluctuates around zero. Here we construct dynamic observables nonlocal in time to explore the volatility-return correlation, based on the empirical data of hundreds of individual stocks and 25 stock market indices in different countries. Strikingly, the correlation is discovered to be non-zero, with an amplitude of a few percent and a duration of over two weeks. This result provides compelling evidence that past volatilities nonlocal in time affect future returns. Further, we introduce an agent-based model with a novel mechanism, that is, the asymmetric trading preference in volatile and stable markets, to understand the microscopic origin of the volatility-return correlation nonlocal in time.

Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0118399 (text/html)
https://journals.plos.org/plosone/article/file?id= ... 18399&type=printable (application/pdf)

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:plo:pone00:0118399

DOI: 10.1371/journal.pone.0118399

Access Statistics for this article

More articles in PLOS ONE from Public Library of Science
Bibliographic data for series maintained by plosone (plosone@plos.org).