A Theory of Fluctuations in Stock Prices

Details A Theory of Fluctuations in Stock Prices A Theory of Fluctuations in Stock Prices

2004-09-14

arxiv.org/abs/cond-mat/0409375v2

Physics

Condensed Matter

Other Condensed Matter

16 pages, 9 figures

Scientific paper

The distribution of price returns for a class of uncorrelated diffusive dynamics is considered. The basic assumptions are (1) that there is a "consensus" value associated with a stock, and (2) that the rate of diffusion depends on the deviation of the stock price from the consensus value. We find an analytical expression for the distribution of returns in terms of the diffusion rate, when the consensus value is assumed to be fixed in time. The analytical solution is shown to match computed histograms in two simple cases. Differences that result when the consensus value is allowed to change with time are presented qualitative explanations.

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