Related papers: Noise, risk premium, and bubble
The present paper describes a practical example in which the probability distribution of the prices of a stock market blue chip is calculated as the wave function of a quantum particle confined in a potential well. This model may naturally…
We propose a model for the credit markets in which the random default times of bonds are assumed to be given as functions of one or more independent "market factors". Market participants are assumed to have partial information about each of…
In this paper, we present a method of estimating the volatility of a signal that displays stochastic noise (such as a risky asset traded on an open market) utilizing Linear Predictive Coding. The main purpose is to associate volatility with…
"\textit{The noise is the signal}"[R. Landauer, Nature \textbf{392}, 658 (1998)] emphasizes the rich information content encoded in fluctuations. This paper assesses the dynamical role of fluctuations of a quantum system driven far from…
We consider a financial market in discrete time and study pricing and hedging conditional on the information available up to an arbitrary point in time. In this conditional framework, we determine the structure of arbitrage-free prices.…
We describe a simple model for speculative trading based on adaptive behavior of economic agents.The adaptive behavior is expressed through a feedback mechanism for changing agents' stock-to-bond ratios, depending on the past performance of…
How can we approach the truth in a society? It may depend on various factors. In this paper, using a well-established truth seeking model, we show that the persistent free information flow will bring us to the truth. Here the free…
Financial price changes obey two universal properties: they follow a power law and they tend to be clustered in time. The second regularity, known as volatility clustering, entails some predictability in the price changes: while their sign…
The usual interpretation of noise is represented by a sum of many independent two-level elementary random signals with a distribution of relaxation times. In this paper it is demonstrated that also the superposition of many similar…
The price of a stock will rarely follow the assumed model and a curious investor or a Regulatory Authority may wish to obtain a probability model the prices support. A risk neutral probability ${\cal P}^*$ for the stock's price at time $T$…
Filtered Poisson processes are often used as reference models for intermittent fluc- tuations in physical systems. Such a process is here extended by adding a noise term, either as a purely additive term to the process or as a dynamical…
Based on a criterium of mathematical simplicity and consistency with empirical market data, a stochastic volatility model has been obtained with the volatility process driven by fractional noise. Depending on whether the stochasticity…
Trade is one of the essential feature of human intelligence. The securities market is the ultimate expression of it. The fundamental indicators of stocks include information as well as the effects of noise and bias on the stock prices;…
We study asset price bubbles in market models with proportional transaction costs $\lambda\in (0,1)$ and finite time horizon $T$ in the setting of [49]. By following [28], we define the fundamental value $F$ of a risky asset $S$ as the…
We attempt to explain stock market dynamics in terms of the interaction among three variables: market price, investor opinion and information flow. We propose a framework for such interaction and apply it to build a model of stock market…
The rise of autonomous pricing systems has sparked growing concern over algorithmic collusion in markets from retail to housing. This paper examines controlled information quality as an ex ante policy lever: by reducing the fidelity of data…
Neuronal responses are conspicuously variable. We focus on one particular aspect of that variability: the precision of action potential timing. We show that for common models of noisy spike generation, elementary considerations imply that…
The dynamics of market prices is described as the evolution of opinions in the trading community regarding future market behavior. The price then is a function of the voting process of the market players in favor to raise or reduce the…
In a market with one safe and one risky asset, an investor with a long horizon, constant investment opportunities, and constant relative risk aversion trades with small proportional transaction costs. We derive explicit formulas for the…
Using frequency distributions of daily closing price time series of several financial market indexes, we investigate whether the bias away from an equiprobable sequence distribution found in the data, predicted by algorithmic information…