Powerlaws in economy and finance: some ideas from physics
Abstract
We discuss several models in order to shed light on the origin of powerlaw distributions and powerlaw 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 leads to *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 pseudogeometric progression of natural human time scales on the long range nature of the volatility correlations.
 Publication:

arXiv eprints
 Pub Date:
 August 2000
 arXiv:
 arXiv:condmat/0008103
 Bibcode:
 2000cond.mat..8103B
 Keywords:

 Condensed Matter
 EPrint:
 16 pages, Proceedings of the SantaFe Conference `Beyond Efficiency' held in May 2000, to appear in Journal of Quantitative Finance