Description of dynamics of stock prices by a Langevin approach

Zi-Gang Huang, Yong Chen, Yong Zhang and Ying-Hai Wang

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Abstract: We present a time-dependent Langevin description of dynamics of stock prices. Based on a simple sliding-window algorithm, the fluctuation of stock prices is discussed in the view of a time-dependent linear restoring force which is the linear approximation of the drift parameter in Langevin equation estimated from the financial time series. By choosing suitable weighted factor for the linear approximation, the relation between the dynamical effect of restoring force and the autocorrelation of the financial time series is deduced. We especially analyze the daily log-returns of S$&$P 500 index from 1950 to 1999. The significance of the restoring force towards the prices evolution are investigated from its two coefficients, slope coefficient and equilibrium position. The new simple form of the restoring force obtained both from statistical and theoretical analyses suggests that the Langevin approach can effectively present the macroscopical and the detail properties of the price evolution.

Date: 2005-11
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Published in Chinese Physics 16, 1009 (2007)

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