Theoretical and empirical analysis of trading activity

DOI10.1007/S10107-018-1341-XMaRDI QIDQ2189447zbMATH OpenOpenAlexDBLPWikidataFDO

Authors Mathias Pohl, Alexander Ristig, Ludovic Tangpi, Walter Schachermayer

Publication date 15 June 2020

Published in Mathematical Programming. Series A. Series B (Search for Journal in Brave)

Copyright license Creative Commons Attribution 4.0 International

Full work available at URL https://arxiv.org/abs/1803.04892

zbMATH Keywords

scaling lawsfinancial variablesstructure of financial marketstrading activity

Mathematics Subject Classification ID

Financial markets (91G15)

Abstract: Understanding the structure of financial markets deals with suitably determining the functional relation between financial variables. In this respect, important variables are the trading activity, defined here as the number of trades $N$, the traded volume $V$, the asset price $P$, the squared volatility $sigm{a}^2$, the bid-ask spread $S$ and the cost of trading $C$. Different reasonings result in simple proportionality relations ("scaling laws") between these variables. A basic proportionality is established between the trading activity and the squared volatility, i.e., $Nsimsigm{a}^2$. More sophisticated relations are the so called 3/2-law $N^{3/2}simsigmaPV/C$ and the intriguing scaling $Nsim(sigmaP/S{)}^2$. We prove that these "scaling laws" are the only possible relations for considered sets of variables by means of a well-known argument from physics: dimensional analysis. Moreover, we provide empirical evidence based on data from the NASDAQ stock exchange showing that the sophisticated relations hold with a certain degree of universality. Finally, we discuss the time scaling of the volatility $sigma$, which turns out to be more subtle than one might naively expect.

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Cited in

(11)

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• Trading-flow assisted estimation of the jump activity index
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• Understanding the cubic and half-cubic laws of financial fluctuations
• Special issue: On the interface between optimization and probability
• scientific article; zbMATH DE number 1644099 (Why is no real title available?)
• Trading volume in financial markets: an introductory review
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