Predicting Stock Market Prices with Physical Laws

33 Pages Posted: 30 Jan 2017 Last revised: 22 Feb 2017

Jack Manhire

Texas A&M University School of Law

Date Written: January 30, 2017

Abstract

This paper argues that one can calculate the probability of an asset's price displacement in a specific direction assuming the asset complies with the physical principle of least action. It first suggests that the price displacement of a financial asset is essentially dampened harmonic motion and then applies physical principles such as the Lagrangian and stationary action to analyze this motion. From this analysis, the paper constructs a method to predict the probability of an asset's price displacement in both magnitude and direction. Initial tests show that the method produces accurate probability predictions.

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

Manhire, Jack, Predicting Stock Market Prices with Physical Laws (January 30, 2017). Texas A&M University School of Law Legal Studies Research Paper No. 17-13. Available at SSRN: https://ssrn.com/abstract=2907459

Jack Manhire (Contact Author)

Texas A&M University School of Law ( email )

1515 Commerce St.
Fort Worth, TX 76102
United States

HOME PAGE: http://law.tamu.edu/faculty-staff/find-people/faculty-profiles/jack-manhire

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