Price dynamics from a simple multiplicative random process model |
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Authors: | S Reimann |
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Institution: | (1) Swiss Banking Institute, University of Zurich, Zurich, Switzerland |
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Abstract: | The existence of stylized facts suggests that there might be `universal' mechanism which drives price evolution on financial
markets in general. Based on empirical estimates of 10 major indices, we propose a stylized model of endogenous price formation
on an aggregate level whose key issue is that price evolution is driven by the `market's' expectations about future growth
rates of investment. The model is a multiplicative random process with a stochastic, state-dependent growth rate which establishes
a negative feedback component in the price dynamics which admits some far reaching formal analysis. Generated return trails
exhibit statistical properties such as 'volatility clustering', multi scaling, and a non-Gaussian distribution which is in
quantitative in agreement with stylized facts from empirical asset returns.
Additionally non-equilibrium entropies are also considered.
These results suggests that the structure of the model mimicks a mechanism which is essential in driving price dynamics of
financial markets in general. |
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Keywords: | |
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