1997/12/31 by Rama Cont, Jean-Philippe Bouchaud · 3 citations
Physics and Astronomy · Economics, Econometrics and Finance · #cond-mat.stat-mech #adap-org #cond-mat.dis-nn #nlin.AO #q-fin.ST
paper · pdf · doi:10.1017/s1365100500015029
published as Macroeconomic Dynamics, 2000, Volume 4, No 2, 170-196 · Minor modifications in text, references added. 29 pages, typesetted using LATEX
arxiv created 1998/01/06 · arxiv updated 2014/01/14
We present a simple model of a stock market where a random communication structure between agents gives rise to a heavy tails in the distribution of stock price variations in the form of an exponentially truncated power-law, similar to distributions observed in recent empirical studies of high frequency market data. Our model provides a link between two well-known market phenomena: the heavy tails observed in the distribution of stock market returns on one hand and 'herding' behavior in financial markets on the other hand. In particular, our study suggests a relation between the excess kurtosis observed in asset returns, the market order flow and the tendency of market participants to imitate each other.