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A queueing theory description of fat-tailed price returns in imperfect financial markets

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  • H. Lamba

Abstract

In a financial market, for agents with long investment horizons or at times of severe market stress, it is often changes in the asset price that act as the trigger for transactions or shifts in investment position. This suggests the use of price thresholds to simulate agent behavior over much longer timescales than are currently used in models of order-books. We show that many phenomena, routinely ignored in efficient market theory, can be systematically introduced into an otherwise efficient market, resulting in models that robustly replicate the most important stylized facts. We then demonstrate a close link between such threshold models and queueing theory, with large price changes corresponding to the busy periods of a single-server queue. The distribution of the busy periods is known to have excess kurtosis and non-exponential decay under various assumptions on the queue parameters. Such an approach may prove useful in the development of mathematical models for rapid deleveraging and panics in financial markets, and the stress-testing of financial institutions. Copyright EDP Sciences, SIF, Springer-Verlag Berlin Heidelberg 2010

Suggested Citation

  • H. Lamba, 2010. "A queueing theory description of fat-tailed price returns in imperfect financial markets," The European Physical Journal B: Condensed Matter and Complex Systems, Springer;EDP Sciences, vol. 77(2), pages 297-304, September.
  • Handle: RePEc:spr:eurphb:v:77:y:2010:i:2:p:297-304
    DOI: 10.1140/epjb/e2010-00248-5
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    References listed on IDEAS

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    1. Barberis, Nicholas & Thaler, Richard, 2003. "A survey of behavioral finance," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 18, pages 1053-1128, Elsevier.
    2. Alfarano, Simone & Milaković, Mishael, 2008. "Should Network Structure Matter in Agent-Based Finance?," Economics Working Papers 2008-04, Christian-Albrechts-University of Kiel, Department of Economics.
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