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The continuous time random walk formalism in financial markets

Author

Listed:
  • Jaume Masoliver

    (Departament de Física Fonamental, Universitat de Barcelona, Diagonal, 647, 08028-Barcelona, Spain)

  • Miquel Montero

    (Departament de Física Fonamental, Universitat de Barcelona, Diagonal, 647, 08028-Barcelona, Spain)

  • Josep Perello

    (Departament de Física Fonamental, Universitat de Barcelona, Diagonal, 647, 08028-Barcelona, Spain)

Abstract

We adapt the continuous time random walk (CTRW) formalism to describe the asset price evolution. We show some of the problems that can be treated using this approach. We basically focus on two aspects: (i) the derivation of the price distribution from high-frequency data; and (ii) the inverse problem, that is, obtaining information on the market microstructure as reflected by high-frequency data knowing only the daily volatility. We apply the formalism to actual financial data and try to show that the CTRW offers alternative tools to deal with several complex issues of financial markets.

Suggested Citation

  • Jaume Masoliver & Miquel Montero & Josep Perello, "undated". "The continuous time random walk formalism in financial markets," Modeling, Computing, and Mastering Complexity 2003 24, Society for Computational Economics.
    • Handle: RePEc:sce:cplx03:24
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    References listed on IDEAS

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    8. Jaume Masoliver & Miquel Montero & George H. Weiss, 2002. "A continuous time random walk model for financial distributions," Papers cond-mat/0210513, arXiv.org.
    9. R. Kutner & F. Switała, 2003. "Stochastic simulations of time series within Weierstrass-Mandelbrot walks," Quantitative Finance, Taylor & Francis Journals, vol. 3(3), pages 201-211.
    10. Benoit Mandelbrot, 2015. "The Variation of Certain Speculative Prices," World Scientific Book Chapters, in: Anastasios G Malliaris & William T Ziemba (ed.), THE WORLD SCIENTIFIC HANDBOOK OF FUTURES MARKETS, chapter 3, pages 39-78, World Scientific Publishing Co. Pte. Ltd..
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Jiang, Zhi-Qiang & Chen, Wei & Zhou, Wei-Xing, 2009. "Detrended fluctuation analysis of intertrade durations," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(4), pages 433-440.
    2. Ni, Xiao-Hui & Jiang, Zhi-Qiang & Gu, Gao-Feng & Ren, Fei & Chen, Wei & Zhou, Wei-Xing, 2010. "Scaling and memory in the non-Poisson process of limit order cancelation," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(14), pages 2751-2761.
    3. Ruan, Yong-Ping & Zhou, Wei-Xing, 2011. "Long-term correlations and multifractal nature in the intertrade durations of a liquid Chinese stock and its warrant," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(9), pages 1646-1654.
    4. Villarroel, Javier & Montero, Miquel, 2009. "On properties of continuous-time random walks with non-Poissonian jump-times," Chaos, Solitons & Fractals, Elsevier, vol. 42(1), pages 128-137.
    5. Scalas, Enrico & Viles, Noèlia, 2014. "A functional limit theorem for stochastic integrals driven by a time-changed symmetric α-stable Lévy process," Stochastic Processes and their Applications, Elsevier, vol. 124(1), pages 385-410.
    6. Jaros{l}aw Klamut & Tomasz Gubiec, 2018. "Directed Continuous-Time Random Walk with memory," Papers 1807.01934, arXiv.org.
    7. Sazuka, Naoya & Inoue, Jun-ichi & Scalas, Enrico, 2009. "The distribution of first-passage times and durations in FOREX and future markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 388(14), pages 2839-2853.
    8. Jiang, Zhi-Qiang & Chen, Wei & Zhou, Wei-Xing, 2008. "Scaling in the distribution of intertrade durations of Chinese stocks," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(23), pages 5818-5825.
    9. Schumer, Rina & Baeumer, Boris & Meerschaert, Mark M., 2011. "Extremal behavior of a coupled continuous time random walk," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 390(3), pages 505-511.
    10. Miquel Montero, 2021. "Predator–prey model for stock market fluctuations," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 16(1), pages 29-57, January.
    11. Jaume Masoliver & Miquel Montero & Josep Perelló, 2021. "Jump-Diffusion Models for Valuing the Future: Discounting under Extreme Situations," Mathematics, MDPI, vol. 9(14), pages 1-26, July.

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    More about this item

    Keywords

    continuous time random walk; volatility; financial markets; market microstructure;
    All these keywords.

    JEL classification:

    • C16 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Econometric and Statistical Methods; Specific Distributions
    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • L1 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance

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