Solvable Stochastic Dealer Models for Financial Markets

Details Solvable Stochastic Dealer Models for Financial Markets Solvable Stochastic Dealer Models for Financial Markets

2008-09-02

arxiv.org/abs/0809.0481v2

Economy

Quantitative Finance

Trading and Market Microstructure

10 pages, 12 figures, 1 table

Scientific paper

We introduce solvable stochastic dealer models, which can reproduce basic empirical laws of financial markets such as the power law of price change. Starting from the simplest model that is almost equivalent to a Poisson random noise generator, the model becomes fairly realistic by adding only two effects, the self-modulation of transaction intervals and a forecasting tendency, which uses a moving average of the latest market price changes. Based on the present microscopic model of markets, we find a quantitative relation with market potential forces, which has recently been discovered in the study of market price modeling based on random walks.

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