Price dynamics from a simple multiplicative random process model
Stylized facts and beyond?
Research Center BiBoS, University of Bielefeld, P.O. 10 01 31, 33501 Bielefeld, Germany
Corresponding author: a firstname.lastname@example.org
Published online: 24 May 2007
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.
PACS: 89.65.Gh – Economics; econophysics, financial markets, business and management
© EDP Sciences, Società Italiana di Fisica, Springer-Verlag, 2007