2009/05/29 by Ebert, M., Paul, W.
#FOS: Economics and business #FOS: Physical sciences #Physics and Society (physics.soc-ph) #Statistical Finance (q-fin.ST) #Trading and Market Microstructure (q-fin.TR)
paper · doi:10.48550/arxiv.0905.4815
Financial markets display scale-free behavior in many different aspects. The power-law behavior of part of the distribution of individual wealth has been recognized by Pareto as early as the nineteenth century. Heavy-tailed and scale-free behavior of the distribution of returns of different financial assets have been confirmed in a series of works. The existence of a Pareto-like distribution of the wealth of market participants has been connected with the scale-free distribution of trading volumes and price-returns. The origin of the Pareto-like wealth distribution, however, remained obscure. Here we show that it is the process of trading itself that under two mild assumptions spontaneously leads to a self-organization of the market with a Pareto-like wealth distribution for the market participants and at the same time to a scale-free behavior of return fluctuations. These assumptions are (i) everybody trades proportional to his current capacity and (ii) supply and demand determine the relative value of the goods.