Theoretical and empirical analysis of trading activity

DOI10.1007/S10107-018-1341-XzbMATH Open1443.91277DBLPjournals/mp/PohlRST20arXiv1803.04892OpenAlexW2963471747WikidataQ97093836 ScholiaQ97093836MaRDI QIDQ2189447FDOQ2189447

Walter Schachermayer, Alexander Ristig, Ludovic Tangpi, Mathias Pohl

Publication date: 15 June 2020

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

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.

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

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zbMATH Keywords

scaling lawsfinancial variablesstructure of financial marketstrading activity

Mathematics Subject Classification ID

Financial markets (91G15)

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Cited In (7)

• Specification and execution of composite trading activities
• Trading-flow assisted estimation of the jump activity index
• Understanding the cubic and half-cubic laws of financial fluctuations
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• Title not available (Why is that?)
• Are trading invariants really invariant? Trading costs matter
• Price fluctuations and market activity

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