15 Pages Posted: 30 Jan 2017 Last revised: 26 Apr 2017
Date Written: April 1, 2017
This paper explores the possibility that asset prices, especially those traded in large volume on public exchanges, might comply with specific physical laws of motion and probability. The paper first examines the basic dynamics of asset price displacement and finds one can model this dynamic as a simple harmonic oscillator at very local "slices" of elapsed time. Based on this finding, the paper theorizes that price displacements are constrained, meaning they have extreme values beyond which they cannot go when measured over a large number of sequential periods. By assuming price displacements are also subject to the principle of stationary action, the paper explores a method for measuring specific probabilities of future price displacements based on prior historical data. Testing this theory with two prevalent stock indices suggests it can make accurate forecasts as to constraints on extreme price movements during market "crashes" and probabilities of specific price displacements at other times.
Keywords: econophysics; asset prices; market model; probability; principle of least action; stock market; statistical finance; predictability
JEL Classification: C02; C63; C65; C1; C55; D4; G1; G12; L1; C25
Suggested Citation: Suggested Citation
Manhire, Jack, Predicting Stock Market Prices with Physical Laws (April 1, 2017). Texas A&M University School of Law Legal Studies Research Paper No. 17-13. Available at SSRN: https://ssrn.com/abstract=2907459