Fluctuations and Response in Financial Markets: The Subtle Nature of 'Random' Price Changes

26 Pages Posted: 27 Feb 2004

See all articles by Jean-Philippe Bouchaud

Jean-Philippe Bouchaud

Capital Fund Management

Yuval Gefen

Weizmann Institute of Science - Condensed Matter Physics Department

Marc Potters

Capital Fund Management

Matthieu Wyart

Centre d'Etudes de Saclay (CEA) - Service de Physique de l'Etat Condense (SPEC)

Date Written: July 14, 2003

Abstract

Using Trades and Quotes data from the Paris stock market, we show that the random walk nature of traded prices results from a very delicate interplay between two opposite tendencies: strongly correlated market orders that lead to super-diffusion (or persistence), and mean reverting limit orders that lead to sub-diffusion (or anti-persistence). We define and study a model where the price, at any instant, is the result of the impact of all past trades, mediated by a non constant 'propagator' in time that describes the response of the market to a single trade. Within this model, the market is shown to be, in a precise sense, at a critical point, where the price is purely diffusive and the average response function almost constant. We find empirically, and discuss theoretically, a fluctuation-response relation. We discuss the information content of each trade, and find that it is on average very small.

Keywords: Financial markets, order book, market microstructure

JEL Classification: G10

Suggested Citation

Bouchaud, Jean-Philippe and Gefen, Yuval and Potters, Marc and Wyart, Matthieu, Fluctuations and Response in Financial Markets: The Subtle Nature of 'Random' Price Changes (July 14, 2003). Available at SSRN: https://ssrn.com/abstract=507322 or http://dx.doi.org/10.2139/ssrn.507322

Jean-Philippe Bouchaud

Capital Fund Management ( email )

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

Yuval Gefen

Weizmann Institute of Science - Condensed Matter Physics Department ( email )

234 Herzl Street
Rehovot, 76100
Israel

Marc Potters (Contact Author)

Capital Fund Management ( email )

23 rue de l'Université
Paris, 75007
France
+33 1 49 49 59 10 (Phone)
+33 1 47 70 17 40 (Fax)

HOME PAGE: http://www.cfm.fr

Matthieu Wyart

Centre d'Etudes de Saclay (CEA) - Service de Physique de l'Etat Condense (SPEC) ( email )

Orme des Meurisiers
91191 Gif-sur-Yvette cedex
France
+33 1 69 08 72 45 (Phone)
+33 1 69 08 87 86 (Fax)

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