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In Part II of this paper, we concentrate our analysis on the price dynamical model with the moving average rules developed in Part I of this paper. By decomposing the excessive demand function, we reveal that it is the interplay between…
One approach to the analysis of stochastic fluctuations in market prices is to model characteristics of investor behaviour and the complex interactions between market participants, with the aim of extracting consequences in the aggregate.…
We amend and extend the Chiarella model of financial markets to deal with arbitrary long-term value drifts in a consistent way. This allows us to improve upon existing calibration schemes, opening the possibility of calibrating individual…
In the standard equilibrium and/or arbitrage pricing framework, the value of any asset is uniquely specified from the belief that only the systematic risks need to be remunerated by the market. Here, we show that, even for arbitrary large…
What is the demand elasticity of statistical arbitrageurs that invest according to the advice of modern cross-sectional asset pricing models? Thirteen models from the literature exhibit strikingly inelastic demand, in contrast to classical…
We consider the consumption-based asset pricing model, derive a new modified basic pricing equation, and present its successive approximations using the Taylor series expansions of the investor's utility during the averaging time interval.…
Markets have internal dynamics leading to excess volatility and other phenomena that are difficult to explain using rational expectations models. This paper studies these using a nonequilibrium price formation rule, developed in the context…
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The volatility of financial instruments is rarely constant, and usually varies over time. This creates a phenomenon called volatility clustering, where large price movements on one day are followed by similarly large movements on successive…
In this paper we present a novel approach to the determination of fat tails in financial data by studying the information contained in the limit order book. In an order-driven market buyers and sellers may submit limit orders, which are…
Prediction markets mobilize financial incentives to forecast binary event outcomes through the aggregation of dispersed beliefs and heterogeneous information. Their growing popularity and demonstrated predictive accuracy in political…
We study the temporal fluctuations in time-dependent stock prices (both individual and composite) as a stochastic phenomenon using general techniques and methods of nonequilibrium statistical mechanics. In particular, we analyze stock price…
This paper considers one-dimensional mixed causal/noncausal autoregressive (MAR) processes with heavy tail, usually introduced to model trajectories with patterns including asymmetric peaks and throughs, speculative bubbles, flash crashes,…
Volatility is a key measure of risk in financial analysis. The high volatility of one financial asset today could affect the volatility of another asset tomorrow. These lagged effects among volatilities - which we call volatility spillovers…
Detection of power-law behavior and studies of scaling exponents uncover the characteristics of complexity in many real world phenomena. The complexity of financial markets has always presented challenging issues and provided interesting…
Standard quantitative models of the stock market predict a log-normal distribution for stock returns (Bachelier 1900, Osborne 1959), but it is recognised (Fama 1965) that empirical data, in comparison with a Gaussian, exhibit leptokurtosis…
We present a set of models of the main stylized facts of market price fluctuations. These models comprise dynamical evolution with threshold dynamics and Langevin price equation with multiplicative noise, percolation models to describe the…
Proponents of behavioral finance have identified several "puzzles" in the market that are inconsistent with rational finance theory. One such puzzle is the "excess volatility puzzle". Changes in equity prices are too large given changes in…
Implementing a set of microeconomic criteria, we develop price dynamics equations using a function of demand/supply with key symmetry properties. The function of demand/supply can be linear or nonlinear. The type of function determines the…
We propose a simple stochastic model of market behavior. Dividing market participants into two groups: trend-followers and fundamentalists, we derive the general form of a stochastic equation of market dynamics. The model has two…