The minimal model of financial complexity

Philip Z. Maymin

Quantitative Finance, 2011, vol. 11, issue 9, 1371-1378

Abstract: A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.

Date: 2011
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DOI: 10.1080/14697681003709447

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