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Price dynamics from a simple multiplicative random process model

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  • S. Reimann

Abstract

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. Copyright EDP Sciences/Società Italiana di Fisica/Springer-Verlag 2007

Suggested Citation

  • S. Reimann, 2007. "Price dynamics from a simple multiplicative random process model," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 56(4), pages 381-394, April.
    • Handle: RePEc:spr:eurphb:v:56:y:2007:i:4:p:381-394
    DOI: 10.1140/epjb/e2007-00141-4
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    References listed on IDEAS

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    1. Hommes, Cars H., 2006. "Heterogeneous Agent Models in Economics and Finance," Handbook of Computational Economics, in: Leigh Tesfatsion & Kenneth L. Judd (ed.), Handbook of Computational Economics, edition 1, volume 2, chapter 23, pages 1109-1186, Elsevier.
    2. Bouchaud,Jean-Philippe & Potters,Marc, 2003. "Theory of Financial Risk and Derivative Pricing," Cambridge Books, Cambridge University Press, number 9780521819169.
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