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The subtle nature of financial random walks

Chaos 15, 026104 (2005); doi:10.1063/1.1889265

Published 17 June 2005

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Jean-Philippe Bouchaud
Science and Finance, Capital Fund Management, 6-8 Bd Haussmann, Paris 75 009, France and SPEC, Commissariat à l'Energie Atomique, Orme des Merisiers, 91191 Gif-sur-Yvette, Cedex, France
We first review the most important "stylized facts" of financial time series, that turn out to be, to a large extent, universal. We then recall how the multifractal random walk of Bacry, Muzy, and Delour generalizes the standard model of financial price changes and accounts in an elegant way for many of their empirical properties. In a second part, we provide empirical evidence for a very subtle compensation mechanism that underlies the random nature of price changes. This compensation drives the market close to a critical point, that may explain the sensitivity of financial markets to small perturbations, and their propensity to enter bubbles and crashes. We argue that the resulting unpredictability of price changes is very far from the neoclassical view that markets are informationally efficient. ©2005 American Institute of Physics
History: Received 17 December 2004; accepted 19 February 2005; published 17 June 2005
Permalink: http://link.aip.org/link/?CHAOEH/15/026104/1
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KEYWORDS and PACS

Keywords
PACS
  • 05.40.Fb
    Random walks and Levy flights
  • 05.45.Df
    Fractals
  • 89.65.Gh
    Economics; econophysics, financial markets, business and management
  • 01.30.Rr
    Surveys and tutorial papers; resource letters
  • 05.50.+q
    Lattice theory and statistics including Ising, Potts models, etc
  • YEAR: 2005

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PUBLICATION DATA

ISSN:
1054-1500 (print)   1089-7682 (online)
Publisher:
AIP is a member of CrossRef AIP

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