DYNAMICAL EXPLANATION FOR THE EMERGENCE OF POWER LAW IN A STOCK MARKET MODEL

Moshe Levy (), Sorin Solomon and Givat Ram
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Sorin Solomon: Department of Theoretical Physics, Racah Institute of Physics, Israel
Givat Ram: The Hebrew University of Jerusalem, Jerusalem 91904, Israel

International Journal of Modern Physics C (IJMPC), 1996, vol. 07, issue 01, 65-72

Abstract: Power laws are found in a wide range of different systems: From sand piles to word occurrence frequencies and to the size distribution of cities. The natural emergence of these power laws in so many different systems, which has been called self-organized criticality, seems rather mysterious and awaits a rigorous explanation. In this letter we study the stationary regime of a previously introduced dynamical microscopic model of the stock market. We find that the wealth distribution among investors spontaneously converges to a power law. We are able to explain this phenomenon by simple general considerations. We suggest that similar considerations may explain self-organized criticality in many other systems. They also explain the Levy distribution.

Keywords: Self-Organized Criticality; Power Laws; Complex Systems; Computer Simulations; Stock Market (search for similar items in EconPapers)
Date: 1996
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DOI: 10.1142/S0129183196000077

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