From short to fat tails in financial markets: a unified description

DOI10.1140/EPJB/E2007-00360-7zbMATH Open1189.91115arXiv0801.3263OpenAlexW2118850455WikidataQ61412678 ScholiaQ61412678MaRDI QIDQ978717FDOQ978717

Authors: A. A. G. Cortines, R. Riera, Celia Anteneodo 

Publication date: 25 June 2010

Published in: The European Physical Journal B. Condensed Matter and Complex Systems (Search for Journal in Brave)

Abstract: In complex systems such as turbulent flows and financial markets, the dynamics in long and short time-lags, signaled by Gaussian and fat-tailed statistics, respectively, calls for a unified description. To address this issue we analyze a real dataset, namely, price fluctuations, in a wide range of temporal scales to embrace both regimes. By means of Kramers-Moyal (KM) coefficients evaluated from empirical time series, we obtain the evolution equation for the probability density function (PDF) of price returns. We also present consistent asymptotic solutions for the timescale dependent equation that emerges from the empirical analysis. From these solutions, new relationships connecting PDF characteristics, such as tail exponents, to parameters of KM coefficients arise. The results reveal a dynamical path that leads from Gaussian to fat-tailed statistics, furnishing insights on other complex systems where akin crossover is observed.

Full work available at URL: https://arxiv.org/abs/0801.3263

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Mathematics Subject Classification ID

Economic time series analysis (91B84) PDEs in connection with game theory, economics, social and behavioral sciences (35Q91) Applications of statistical and quantum mechanics to economics (econophysics) (91B80) Fokker-Planck equations (35Q84)

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Cited In (4)

• Fat tails arise endogenously from supply/demand, with or without jump processes
• The origin of fat-tailed distributions in financial time series
• Investigation of non-Gaussian effects in the Brazilian option market
• An uncertainty measure based on Pearson correlation as well as a multiscale generalized Shannon-based entropy with financial market applications

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