Scaling and data collapse for the mean exit time of asset prices

Details Scaling and data collapse for the mean exit time of asset prices Scaling and data collapse for the mean exit time of asset prices

2005-07-06

arxiv.org/abs/physics/0507054v1

PHYSICAL REVIEW E 72, 056101 (2005)

Physics

Physics and Society

REVTeX 4, 11 pages, 8 figures, 1 table, submitted for publication

Scientific paper

10.1103/PhysRevE.72.056101

We study theoretical and empirical aspects of the mean exit time of financial time series. The theoretical modeling is done within the framework of continuous time random walk. We empirically verify that the mean exit time follows a quadratic scaling law and it has associated a pre-factor which is specific to the analyzed stock. We perform a series of statistical tests to determine which kind of correlation are responsible for this specificity. The main contribution is associated with the autocorrelation property of stock returns. We introduce and solve analytically both a two-state and a three-state Markov chain models. The analytical results obtained with the two-state Markov chain model allows us to obtain a data collapse of the 20 measured MET profiles in a single master curve.

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