Physics – Physics and Society
Scientific paper
2006-02-14
Physics
Physics and Society
13 pages, 5 figures
Scientific paper
Stylized facts of empirical assets log-returns $Z$ include the existence of (semi) heavy tailed distributions $f_Z(z)$ and a non-linear spectrum of Hurst exponents $\tau(\beta)$. Empirical data considered are daily prices of 10 large indices from 01/01/1990 to 12/31/2004. We propose a stylized model of price dynamics which is driven by expectations. The model is a multiplicative random process with a stochastic, state-dependent growth rate which establishes a negative feedback component in the price dynamics. This 0-order model implies that the distribution of log-returns is Laplacian $f_Z(z) \sim \exp(-\frac{|z|}{\alpha})$, whose single parameter $\alpha$ can be regarded as a measure for the long-time averaged liquidity in the respective market. A comparison with the (more general) Weibull distribution shows that empirical daily log returns are close to being Laplacian distributed. The spectra of Hurst exponents of both, empirical data $\tau_{emp}$ and simulated data due to our model $\tau_{theor}$, are compared. Due to the finding of non-linear Hurst spectra, the Renyi entropy (RE) $R_\beta(f_Z)$is considered. An explicit functional form of the RE for an exponential distribution is derived. Theoretical REs of simulated asset return trails are in good agreement with the RE estimated from empirical returns.
No associations
LandOfFree
An elementary model of price dynamics in a financial market: Distribution, Multiscaling & Entropy does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.
If you have personal experience with An elementary model of price dynamics in a financial market: Distribution, Multiscaling & Entropy, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and An elementary model of price dynamics in a financial market: Distribution, Multiscaling & Entropy will most certainly appreciate the feedback.
Profile ID: LFWR-SCP-O-568489