The Minimal Model of Financial Complexity

Quantitative Finance, Forthcoming

16 Pages Posted: 17 Mar 2008 Last revised: 15 Jun 2016

See all articles by Philip Maymin

Philip Maymin

Fairfield University - Charles F. Dolan School of Business; Athletes Unlimited

Date Written: March 16, 2008

Abstract

A representative investor generates realistic and complex security price paths by following this trading strategy: if, a few ticks ago, the market asset had two consecutive upticks or two consecutive downticks, then sell, and otherwise buy. This simple, unique, and robust model is the smallest possible deterministic model of financial complexity, and its generalization leads to complex variety. Compared to a random walk, the minimal model generates time series with fatter tails and more frequent crashes, thus more closely matching the real world. It does all this without any parameter fitting.

Keywords: finance, complexity, security prices, deterministic, NKS, process

JEL Classification: G10, G19

Suggested Citation

Maymin, Philip, The Minimal Model of Financial Complexity (March 16, 2008). Quantitative Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1106926

Philip Maymin (Contact Author)

Fairfield University - Charles F. Dolan School of Business ( email )

N. Benson Road
Fairfield, CT 06824
United States

Athletes Unlimited ( email )

888 7th Avenue
New York, NY 10106
United States

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