Quantifying Stock Price Response to Demand Fluctuations

Details Quantifying Stock Price Response to Demand Fluctuations Quantifying Stock Price Response to Demand Fluctuations

2001-06-29

arxiv.org/abs/cond-mat/0106657v1

Physics

Condensed Matter

Statistical Mechanics

4 pages (multicol fomat, revtex)

Scientific paper

10.1103/PhysRevE.66.027104

We address the question of how stock prices respond to changes in demand. We quantify the relations between price change $G$ over a time interval $\Delta t$ and two different measures of demand fluctuations: (a) $\Phi$, defined as the difference between the number of buyer-initiated and seller-initiated trades, and (b) $\Omega$, defined as the difference in number of shares traded in buyer and seller initiated trades. We find that the conditional expectations $_{\Omega}$ and $_{\Phi}$ of price change for a given $\Omega$ or $\Phi$ are both concave. We find that large price fluctuations occur when demand is very small --- a fact which is reminiscent of large fluctuations that occur at critical points in spin systems, where the divergent nature of the response function leads to large fluctuations.

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