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Replicating financial market dynamics with a simple self-organized critical lattice model

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  • Dupoyet, B.
  • Fiebig, H.R.
  • Musgrove, D.P.

Abstract

We explore a simple lattice field model intended to describe statistical properties of high-frequency financial markets. The model is relevant in the cross-disciplinary area of econophysics. Its signature feature is the emergence of a self-organized critical state. This implies scale invariance of the model, without tuning parameters. Prominent results of our simulation are time series of gains, prices, volatility, and gains frequency distributions, which all compare favorably to features of historical market data. Applying a standard GARCH(1,1) fit to the lattice model gives results that are almost indistinguishable from historical NASDAQ data.

Suggested Citation

  • Dupoyet, B. & Fiebig, H.R. & Musgrove, D.P., 2011. "Replicating financial market dynamics with a simple self-organized critical lattice model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(18), pages 3120-3135.
    • Handle: RePEc:eee:phsmap:v:390:y:2011:i:18:p:3120-3135
    DOI: 10.1016/j.physa.2011.04.017
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    References listed on IDEAS

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    Cited by:

    1. Giovanni Paolinelli & Gianni Arioli, 2018. "A path integral based model for stocks and order dynamics," Papers 1803.07904, arXiv.org.
    2. Paolinelli, Giovanni & Arioli, Gianni, 2018. "A path integral based model for stocks and order dynamics," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 510(C), pages 387-399.
    3. Paolinelli, Giovanni & Arioli, Gianni, 2019. "A model for stocks dynamics based on a non-Gaussian path integral," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 517(C), pages 499-514.
    4. Giovanni Paolinelli & Gianni Arioli, 2018. "A model for stocks dynamics based on a non-Gaussian path integral," Papers 1809.01342, arXiv.org, revised Oct 2018.
    5. Dupoyet, B. & Fiebig, H.R. & Musgrove, D.P., 2012. "Arbitrage-free self-organizing markets with GARCH properties: Generating them in the lab with a lattice model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 391(18), pages 4350-4363.
    6. Fiebig, H.R. & Musgrove, D.P., 2015. "Testing for detailed balance in a financial market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 427(C), pages 26-33.
    7. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034.
    8. B. Dupoyet & H. R. Fiebig & D. P. Musgrove, 2011. "Arbitrage-free Self-organizing Markets with GARCH Properties: Generating them in the Lab with a Lattice Model," Papers 1112.2379, arXiv.org.
    9. Rudolf Fiebig & David Musgrove, 2014. "Testing for Detailed Balance in a Financial Market," Papers 1403.3584, arXiv.org.

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