2001/12/31 by Marcus G. Daniels, Marcus Daniels, J. Doyne Farmer +4
Economics, Econometrics and Finance · Mathematics · Physics and Astronomy · #Complex Systems and Time Series Analysis #Computer science #Diffusion #Econometrics #Economics #Finance #Financial Risk and Volatility Modeling #Financial market #Market Dynamics and Volatility #Market microstructure #Mathematics #Microeconomics #Order (exchange) #Order book #Physics #Poisson distribution #Scaling #Statistical physics #Statistics #Transaction cost #cond-mat.stat-mech #q-fin.TR
paper · pdf · doi:10.1103/physrevlett.90.108102
5 pages, 4 figures
arxiv created 2002/12/10 · openalex publication_date 2003/03/13 · arxiv updated 2013/05/29 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/05
We model trading and price formation in a market under the assumption that order arrival and cancellations are Poisson random processes. This model makes testable predictions for the most basic properties of markets, such as the diffusion rate of prices (which is the standard measure of financial risk) and the spread and price impact functions (which are the main determinants of transaction cost). Guided by dimensional analysis, simulation, and mean-field theory, we find scaling relations in terms of order flow rates. We show that even under completely random order flow the need to store supply and demand to facilitate trading induces anomalous diffusion and temporal structure in prices.