Queueing Theoretic Approaches to Financial Price Fluctuations

in Handbooks in OR&MS: Financial Engineering, 15, eds. John Birge and Vadim Linetsky, (Elsevier)

36 Pages Posted: 30 May 2016  

Erhan Bayraktar

University of Michigan at Ann Arbor - Department of Mathematics

Ulrich Horst

Humboldt University of Berlin

Ronnie Sircar

Princeton University - Department of Operations Research and Financial Engineering

Date Written: February 6, 2006

Abstract

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. This agent-based viewpoint in finance goes back at least to the work of Garman (1976) and shares the philosophy of statistical mechanics in the physical sciences. We discuss recent developments in market microstructure models. They are capable, often through numerical simulations, to explain many stylized facts like the emergence of herding behavior, volatility clustering and fat tailed returns distributions. They are typically queueing-type models, that is, models of order flows, in contrast to classical economic equilibrium theories of utility-maximizing, rational, "representative'' investors. Mathematically, they are analyzed using tools of functional central limit theorems, strong approximations and weak convergence. Our main examples focus on investor inertia, a trait that is well-documented, among other behavioral qualities, and modelled using semi-Markov switching processes. In particular, we show how inertia may lead to the phenomenon of long-range dependence in stock prices.

Suggested Citation

Bayraktar, Erhan and Horst, Ulrich and Sircar, Ronnie, Queueing Theoretic Approaches to Financial Price Fluctuations (February 6, 2006). in Handbooks in OR&MS: Financial Engineering, 15, eds. John Birge and Vadim Linetsky, (Elsevier) . Available at SSRN: https://ssrn.com/abstract=2785845

Erhan Bayraktar (Contact Author)

University of Michigan at Ann Arbor - Department of Mathematics ( email )

2074 East Hall
530 Church Street
Ann Arbor, MI 48109-1043
United States

Ulrich Horst

Humboldt University of Berlin ( email )

Unter den Linden 6
Berlin, Berlin 10099
Germany

Ronnie Sircar

Princeton University - Department of Operations Research and Financial Engineering ( email )

Princeton, NJ 08544
United States

Paper statistics

Downloads
30
Abstract Views
159