On the origin of power-law fluctuations in stock prices

DOI10.1088/1469-7688/4/1/C02MaRDI QIDQ4647592zbMATH OpenOpenAlexFDO

Authors Vasiliki Plerou, H. Eugene Stanley, Xavier Gabaix, Parameswaran Gopikrishnan

Publication date 15 January 2019

Published in Quantitative Finance (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/cond-mat/0403067

Mathematics Subject Classification ID

Applications of statistics to actuarial sciences and financial mathematics (62P05) Portfolio theory (91G10)

Abstract: We respond to the issues discussed by Farmer and Lillo (FL) related to our proposed approach to understanding the origin of power-law distributions in stock price fluctuations. First, we extend our previous analysis to 1000 US stocks and perform a new estimation of market impact that accounts for splitting of large orders and potential autocorrelations in the trade flow. Our new analysis shows clearly that price impact and volume are related by a square-root functional form of market impact for large volumes, in contrast to the claim of FL that this relationship increases as a power law with a smaller exponent. Since large orders are usually executed by splitting into smaller size trades, procedures used by FL give a downward bias for this power law exponent. Second, FL analyze 3 stocks traded on the London Stock Exchange, and solely on this basis they claim that the distribution of transaction volumes do not have a power-law tail for the London Stock Exchange. We perform new empirical analysis on transaction data for the 262 largest stocks listed in the London Stock Exchange, and find that the distribution of volume decays as a power-law with an exponent $approx3/2$ -- in sharp contrast to FL's claim that the distribution of transaction volume does not have a power-law tail. Our exponent estimate of $approx3/2$ is consistent with our previous results from the New York and Paris Stock Exchanges. We conclude that the available empirical evidence is consistent with our hypothesis on the origin of power-law fluctuations in stock prices.

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Cited in

(14)

• Price dynamics in an order-driven market with Bayesian learning
• ``Slimming of power-law tails by increasing market returns
• Quantifying and understanding the economics of large financial movements
• Level crossing analysis of the stock markets
• Analysis of a decision model in the context of equilibrium pricing and order book pricing
• Statistical theory of the continuous double auction
• What really causes large price changes?
• On the origin of power-law tails in price fluctuations
• On the origin of power-law fluctuations in stock prices
• scientific article; zbMATH DE number 5082553 (Why is no real title available?)
• Stylized facts of price gaps in limit order books
• The impact of heterogeneous trading rules on the limit order book and order flows
• Long-range power-law correlations in stock returns
• When is cross impact relevant?

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