Power-Laws in Economy and Finance: Some Ideas from Physics

AFA 2001 New Orleans Meetings

16 Pages Posted: 6 Oct 2000

Date Written: August 2000

Abstract

We discuss several models in order to shed light on the origin of power-law distributions and power-law correlations in financial time series. From an empirical point of view, the exponents describing the tails of the price increments distribution and the decay of the volatility correlations are rather robust and suggest universality. However, many of the models that appear naturally (for example, to account for the distribution of wealth) contain some multiplicative noise, which generically leadsto "non universal exponents". Recent progress in the empirical study of the volatility suggests that the volatility results from some sort of multiplicative cascade. A convincing 'microscopic' (i.e. trader based) model that explains this observation is however not yet available. It would be particularly important to understand the relevance of the pseudo-geometric progression of natural human time scales on the long range nature of the volatility correlations.

JEL Classification: C32 - G14

Suggested Citation

Bouchaud, Jean-Philippe, Power-Laws in Economy and Finance: Some Ideas from Physics (August 2000). AFA 2001 New Orleans Meetings. Available at SSRN: https://ssrn.com/abstract=240608 or http://dx.doi.org/10.2139/ssrn.240608

Jean-Philippe Bouchaud (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 20 (Phone)

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