Mesoscopic modelling of financial markets

Details Mesoscopic modelling of financial markets Mesoscopic modelling of financial markets

2010-09-14

arxiv.org/abs/1009.2743v1

Journal of Statistical Physics, 134, 1, (2009), 161-184

Economy

Quantitative Finance

Statistical Finance

Scientific paper

We derive a mesoscopic description of the behavior of a simple financial market where the agents can create their own portfolio between two investment alternatives: a stock and a bond. The model is derived starting from the Levy-Levy-Solomon microscopic model (Econ. Lett., 45, (1994), 103--111) using the methods of kinetic theory and consists of a linear Boltzmann equation for the wealth distribution of the agents coupled with an equation for the price of the stock. From this model, under a suitable scaling, we derive a Fokker-Planck equation and show that the equation admits a self-similar lognormal behavior. Several numerical examples are also reported to validate our analysis.

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