Economy – Quantitative Finance – Trading and Market Microstructure
Scientific paper
2009-05-29
Economy
Quantitative Finance
Trading and Market Microstructure
Scientific paper
Financial markets display scale-free behavior in many different aspects. The power-law behavior of part of the distribution of individual wealth has been recognized by Pareto as early as the nineteenth century. Heavy-tailed and scale-free behavior of the distribution of returns of different financial assets have been confirmed in a series of works. The existence of a Pareto-like distribution of the wealth of market participants has been connected with the scale-free distribution of trading volumes and price-returns. The origin of the Pareto-like wealth distribution, however, remained obscure. Here we show that it is the process of trading itself that under two mild assumptions spontaneously leads to a self-organization of the market with a Pareto-like wealth distribution for the market participants and at the same time to a scale-free behavior of return fluctuations. These assumptions are (i) everybody trades proportional to his current capacity and (ii) supply and demand determine the relative value of the goods.
Ebert Margaret
Paul Wolfgang
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