Price dynamics from a simple multiplicative random process model
S. Reimann ()
The European Physical Journal B: Condensed Matter and Complex Systems, 2007, vol. 56, issue 4, 381-394
Abstract:
The existence of stylized facts suggests that there might be `universal' mechanism which drives price evolution on financial markets in general. Based on empirical estimates of 10 major indices, we propose a stylized model of endogenous price formation on an aggregate level whose key issue is that price evolution is driven by the `market's' expectations about future growth rates of investment. The model is a multiplicative random process with a stochastic, state-dependent growth rate which establishes a negative feedback component in the price dynamics which admits some far reaching formal analysis. Generated return trails exhibit statistical properties such as 'volatility clustering', multi scaling, and a non-Gaussian distribution which is in quantitative in agreement with stylized facts from empirical asset returns. Additionally non-equilibrium entropies are also considered. These results suggests that the structure of the model mimicks a mechanism which is essential in driving price dynamics of financial markets in general. Copyright EDP Sciences/Società Italiana di Fisica/Springer-Verlag 2007
Keywords: 89.65.Gh Economics; econophysics, financial markets, business and management, (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:spr:eurphb:v:56:y:2007:i:4:p:381-394
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DOI: 10.1140/epjb/e2007-00141-4
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