Stochastic model of financial markets reproducing scaling and memory in volatility return intervals

Vygintas Gontis, Shlomo Havlin, Aleksejus Kononovicius, Boris Podobnik and H. Eugene Stanley

Papers from arXiv.org

Abstract: We investigate the volatility return intervals in the NYSE and FOREX markets. We explain previous empirical findings using a model based on the interacting agent hypothesis instead of the widely-used efficient market hypothesis. We derive macroscopic equations based on the microscopic herding interactions of agents and find that they are able to reproduce various stylized facts of different markets and different assets with the same set of model parameters. We show that the power-law properties and the scaling of return intervals and other financial variables have a similar origin and could be a result of a general class of non-linear stochastic differential equations derived from a master equation of an agent system that is coupled by herding interactions. Specifically, we find that this approach enables us to recover the volatility return interval statistics as well as volatility probability and spectral densities for the NYSE and FOREX markets, for different assets, and for different time-scales. We find also that the historical S\&P500 monthly series exhibits the same volatility return interval properties recovered by our proposed model. Our statistical results suggest that human herding is so strong that it persists even when other evolving fluctuations perturbate the financial system.

Date: 2015-07, Revised 2016-10
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Published in Physica A 462 (2016) 1091-1102

Downloads: (external link)
http://arxiv.org/pdf/1507.05203 Latest version (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:arx:papers:1507.05203

Access Statistics for this paper

More papers in Papers from arXiv.org
Bibliographic data for series maintained by arXiv administrators ().