Scaling and efficiency determine the irreversible evolution of a market
In setting up a stochastic description of the time evolution of a financial index, the challenge consists in devising a model compatible with all stylized facts emerging from the analysis of financial time series and providing a reliable basis for simulating such series. Based on constraints imposed...
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Published in | Proceedings of the National Academy of Sciences - PNAS Vol. 104; no. 50; pp. 19741 - 19744 |
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Main Authors | , |
Format | Journal Article |
Language | English |
Published |
Washington
National Academy of Sciences
11.12.2007
National Acad Sciences |
Subjects | |
Online Access | Get full text |
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Summary: | In setting up a stochastic description of the time evolution of a financial index, the challenge consists in devising a model compatible with all stylized facts emerging from the analysis of financial time series and providing a reliable basis for simulating such series. Based on constraints imposed by market efficiency and on an inhomogeneous-time generalization of standard simple scaling, we propose an analytical model which accounts simultaneously for empirical results like the linear decorrelation of successive returns, the power law dependence on time of the volatility autocorrelation function, and the multiscaling associated to this dependence. In addition, our approach gives a justification and a quantitative assessment of the irreversible character of the index dynamics. This irreversibility enters as a key ingredient in a novel simulation strategy of index evolution which demonstrates the predictive potential of the model. |
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Bibliography: | Edited by Leo P. Kadanoff, University of Chicago, Chicago, IL, and approved October 29, 2007 Author contributions: F.B. and A.L.S. designed research; F.B. and A.L.S. performed research; F.B. and A.L.S. analyzed data; and F.B. and A.L.S. wrote the paper. |
ISSN: | 0027-8424 1091-6490 |
DOI: | 10.1073/pnas.0706046104 |