``Slimming of power-law tails by increasing market returns
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Publication:1599010
DOI10.1016/S0378-4371(02)00614-3zbMATH Open0995.91022arXivcond-mat/0010112MaRDI QIDQ1599010FDOQ1599010
Authors: D. Sornette 
Publication date: 4 June 2002
Published in: Physica A (Search for Journal in Brave)
Abstract: We introduce a simple generalization of rational bubble models which removes the fundamental problem discovered by [Lux and Sornette, 1999] that the distribution of returns is a power law with exponent less than 1, in contradiction with empirical data. The idea is that the price fluctuations associated with bubbles must on average grow with the mean market return r. When r is larger than the discount rate r_delta, the distribution of returns of the observable price, sum of the bubble component and of the fundamental price, exhibits an intermediate tail with an exponent which can be larger than 1. This regime r>r_delta corresponds to a generalization of the rational bubble model in which the fundamental price is no more given by the discounted value of future dividends. We explain how this is possible. Our model predicts that, the higher is the market remuneration r above the discount rate, the larger is the power law exponent and thus the thinner is the tail of the distribution of price returns.
Full work available at URL: https://arxiv.org/abs/cond-mat/0010112
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Cited In (10)
- An index of market shocks based on multiscale analysis
- The bounds of heavy-tailed return distributions in evolving complex networks
- Multi-dimensional rational bubbles and fat tails
- Fat tails and bubbles in a discrete time model of an inefficient financial market
- On the origin of power-law tails in price fluctuations
- EXTRAPOLATION OF POWER SERIES BY SELF-SIMILAR FACTOR AND ROOT APPROXIMANTS
- Why does the power law for stock price hold?
- News and price returns from threshold behaviour and vice-versa: exact solution of an agent-based market model
- From rational bubbles to crashes
- Empirical distributions of stock returns: between the stretched exponential and the power law?
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