Physics – Condensed Matter – Statistical Mechanics
Scientific paper
1999-03-24
Phys. Rev. E 60 (1999) 1390
Physics
Condensed Matter
Statistical Mechanics
34 pages (Revtex pre-print format), 17 figures, 47 references; submitted, Feb 22 1999. Email: yanhui@emergent.com,gopi@bu.edu
Scientific paper
10.1103/PhysRevE.60.1390
We study the statistical properties of volatility---a measure of how much the market is likely to fluctuate. We estimate the volatility by the local average of the absolute price changes. We analyze (a) the S&P 500 stock index for the 13-year period Jan 1984 to Dec 1996 and (b) the market capitalizations of the largest 500 companies registered in the Trades and Quotes data base, documenting all trades for all the securities listed in the three major stock exchanges in the US for the 2-year period Jan 1994 to Dec 1995. For the S&P 500 index, the probability density function of the volatility can be fit with a log-normal form in the center. However, the asymptotic behavior is better described by a power-law distribution characterized by an exponent 1 + \mu \approx 4. For individual companies, we find a power law asymptotic behavior of the probability distribution of volatility with exponent 1 + \mu \approx 4, similar to the S&P 500 index. In addition, we find that the volatility distribution scales for a range of time intervals. Further, we study the correlation function of the volatility and find power law decay with long persistence for the S&P 500 index and the individual companies with a crossover at approximately 1.5 days. To quantify the power-law correlations, we apply power spectrum analysis and a recently-developed modified root-mean-square analysis, termed detrended fluctuation analysis (DFA). For the S&P 500 index, DFA estimates for the exponents characterizing the power law correlations are \alpha_1=0.66 for short time scales (within \approx 1.5 days) and \alpha_2=0.93 for longer time scales (up to a year). For individual companies, we find \alpha_1=0.60 and \alpha_2=0.74, respectively. The power spectrum gives consistent estimates of the two power-law exponents.
Cizeau Pierre
Gopikrishnan Parameswaran
Liu Yanhui
Meyer Martin
Peng Chung-Kang
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