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Diffusion Entropy technique applied to the study of the market activity

Author

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  • Palatella, Luigi
  • Perelló, Josep
  • Montero, Miquel
  • Masoliver, Jaume

Abstract

The present work briefly summarizes the results obtained in Palatella et al. Eur. Phys. J. B 38 (2004) 671 using the Diffusion Entropy technique and adds some new results regarding the Dow Jones Index time series. We show that time distances between peaks of volatility or activity are distributed following an asymptotic power-law which ultimately recovers an exponential behavior. We discuss these results in comparison with the TARCH model, the Ornstein–Uhlenbeck stochastic volatility model and a multi-agent model. We conclude that both ARCH and stochastic volatility models better describe the observed experimental evidences.

Suggested Citation

  • Palatella, Luigi & Perelló, Josep & Montero, Miquel & Masoliver, Jaume, 2005. "Diffusion Entropy technique applied to the study of the market activity," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 355(1), pages 131-137.
    • Handle: RePEc:eee:phsmap:v:355:y:2005:i:1:p:131-137
    DOI: 10.1016/j.physa.2005.02.076
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    References listed on IDEAS

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    1. Gençay, Ramazan & Dacorogna, Michel & Muller, Ulrich A. & Pictet, Olivier & Olsen, Richard, 2001. "An Introduction to High-Frequency Finance," Elsevier Monographs, Elsevier, edition 1, number 9780122796715.
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    Cited by:

    1. Palatella, Luigi, 2010. "A reflexive toy-model for financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(2), pages 315-322.
    2. Reem Abdullah Aljethi & Adem Kılıçman, 2023. "Derivation of the Fractional Fokker–Planck Equation for Stable Lévy with Financial Applications," Mathematics, MDPI, vol. 11(5), pages 1-13, February.

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