From short to fat tails in financial markets: a unified description
Departamento de Física, Pontifícia Universidade Católica do Rio de Janeiro, CP 38097, 22453-900 Rio de Janeiro, Brazil
Published online: 22 December 2007
In complex systems such as turbulent flows and financial markets, the dynamics in long and short time-lags, signaled by Gaussian and fat-tailed statistics, respectively, calls for a unified description. To address this issue we analyze a real dataset, namely, price fluctuations, in a wide range of temporal scales to embrace both regimes. By means of Kramers-Moyal (KM) coefficients evaluated from empirical time series, we obtain the evolution equation for the probability density function (PDF) of price returns. We also present consistent asymptotic solutions for the timescale dependent equation that emerges from the empirical analysis. From these solutions, new relationships connecting PDF characteristics, such as tail exponents, to parameters of KM coefficients arise. The results reveal a dynamical path that leads from Gaussian to fat-tailed statistics, furnishing insights on other complex systems where akin crossover is observed.
PACS: 05.10.Gg – Stochastic analysis methods (Fokker-Planck, Langevin, etc.) / 05.40.-a – Fluctuation phenomena, random processes, noise, and Brownian motion / 89.65.Gh – Economics; econophysics, financial markets, business and management
© EDP Sciences, Società Italiana di Fisica, Springer-Verlag, 2007