Ehrenfest Model with Large Jumps in Finance

Details Ehrenfest Model with Large Jumps in Finance Ehrenfest Model with Large Jumps in Finance

2003-11-26

arxiv.org/abs/cond-mat/0311594v1

Physica D 189 (2004) 61-69

Physics

Condensed Matter

Statistical Mechanics

15 pages, 5 figures

Scientific paper

10.1016/j.physd.2003.07.005

Changes (returns) in stock index prices and exchange rates for currencies are argued, based on empirical data, to obey a stable distribution with characteristic exponent $ \alpha < 2 $ for short sampling intervals and a Gaussian distribution for long sampling intervals. In order to explain this phenomenon, an Ehrenfest model with large jumps (ELJ) is introduced to explain the empirical density function of price changes for both short and long sampling intervals.

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