Related papers: Characterization of foreign exchange market using …
We study the local volatility function in the Foreign Exchange market where both domestic and foreign interest rates are stochastic. This model is suitable to price long-dated FX derivatives. We derive the local volatility function and…
Arguably the most important problem in quantitative finance is to understand the nature of stochastic processes that underlie market dynamics. One aspect of the solution to this problem involves determining characteristics of the…
Financial time series have been investigated to follow fat-tailed distributions. Further, an empirical probability distribution sometimes shows cut-off shapes on its tails. To describe this stylized fact, we incorporate the cut-off effect…
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…
High frequency data in finance have led to a deeper understanding on probability distributions of market prices. Several facts seem to be well stablished by empirical evidence. Specifically, probability distributions have the following…
Fat tails in financial time series and increase of stocks cross-correlations in high volatility periods are puzzling facts that ask for new paradigms. Both points are of key importance in fundamental research as well as in Risk Management…
We give a stochastic microscopic modelling of stock markets driven by continuous double auction. If we take into account the mimetic behavior of traders, when they place limit order, our virtual markets shows the power-law tail of the…
We assume the market price to diffuse in a hierarchical comb of barriers, the heights of which represent the importance of new information entering the market. We find fat tails with the desired exponent for the price change distribution,…
The aim of this paper is to propose a heterogeneous agent model of stock markets that develop complicated endogenous price fluctuations. We find occurrences of non-stationary chaos, or speculative bubble, are caused by the heterogeneity of…
We propose a kinetic model to describe the dynamical evolution of wealth and knowledge in national and global markets, starting from a microscopic description of individual interactions. The model is built upon interaction rules that…
The condition for stationary increments, not scaling, detemines long time pair autocorrelations. An incorrect assumption of stationary increments generates spurious stylized facts, fat tails and a Hurst exponent H_s=1/2, when the increments…
The expOU stochastic volatility model is capable of reproducing fairly well most important statistical properties of financial markets daily data. Among them, the presence of multiple time scales in the volatility autocorrelation is perhaps…
We study the dynamics of exchange value in a system composed of many interacting agents. The simple model we propose exhibits cooperative emergence and collapse of global value for individual goods. We demonstrate that the demand that…
A deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices. This paper uses a market maker based method of price…
In this paper we aim to improve existing empirical exchange rate models by accounting for uncertainty with respect to the underlying structural representation. Within a flexible Bayesian non-linear time series framework, our modeling…
(The third edition corrects minor typos and adds 3 chapters synthesized from published papers plus an appendix on maximum entropy distributions.) The monograph investigates the misapplication of conventional statistical techniques to fat…
In complex systems such as turbulent flows and financial markets, the dynamics in long and short time-lags, signaled by Gaussian and fat-tailed statistics, respectively, calls for a unified description. To address this issue we analyze a…
We discuss a family of models expressed by nonlinear differential equation systems describing closed market societies in the presence of taxation and redistribution. We focus in particular on three example models obtained in correspondence…
We show that the quotient of Levy processes of jump-diffusion type has a fat-tailed distribution. An application is to price theory in economics. We show that fat tails arise endogenously from modeling of price change based on an excess…
The distribution of returns in financial time series exhibits heavy tails. In empirical studies, it has been found that gaps between the orders in the order book lead to large price shifts and thereby to these heavy tails. We set up an…