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Correlated Randomness: Rare and Not-so-Rare Events in Finance

In: Practical Fruits of Econophysics

Author

Listed:
  • H. E. Stanley

    (Boston University)

  • Xavier Gabaix

    (MIT
    National Bureau of Economic Research)

  • Parameswaran Gopikrishnan

    (Boston University)

  • Vasiliki Plerou

    (Boston University)

Abstract

One challenge of economics is that the systems treated by these sciences have no perfect metronome in time and no perfect spatial architecture—crystalline or otherwise. Nonetheless, as if by magic, out of nothing but randomness one finds remarkably fine-tuned processes in time. To understand this “miracle,” one might consider placing aside the human tendency to see the universe as a machine. Instead, one might address the challenge of uncovering how, through randomness (albeit, as we shall see, strongly correlated randomness), one can arrive at many temporal patterns in economics. Inspired by principles developed by statistical physics over the past 50 years—scale invariance and universality—we review some recent applications of correlated randomness to economics.

Suggested Citation

  • H. E. Stanley & Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou, 2006. "Correlated Randomness: Rare and Not-so-Rare Events in Finance," Springer Books, in: Hideki Takayasu (ed.), Practical Fruits of Econophysics, pages 2-18, Springer.
    • Handle: RePEc:spr:sprchp:978-4-431-28915-9_1
    DOI: 10.1007/4-431-28915-1_1
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