A nonextensive approach to the dynamics of financial observables

Statistical methods; risk measures (91G70) Applications of statistical and quantum mechanics to economics (econophysics) (91B80) Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Applications of stochastic analysis (to PDEs, etc.) (60H30) Financial applications of other theories (91G80)

Abstract: We present results about financial market observables, specifically returns and traded volumes. They are obtained within the current nonextensive statistical mechanical framework based on the entropy

S_{q} = k f r a c 1 - s u m l i m i t s_{i = 1}^{W} p_{i}^{q} 1 - q (q i n R e)

(

S_{1} e q u i v S_{B G} = - k s u m l i m i t s_{i = 1}^{W} p_{i} l n p_{i}

). More precisely, we present stochastic dynamical mechanisms which mimic probability density functions empirically observed. These mechanisms provide possible interpretations for the emergence of the entropic indices

q

in the time evolution of the corresponding observables. In addition to this, through multi-fractal analysis of return time series, we verify that the dual relation

q_{s t a t} + q_{s e n s} = 2

is numerically satisfied,

q_{s t a t}

and

q_{s e n s}

being associated to the probability density function and to the sensitivity to initial conditions respectively. This type of simple relation, whose understanding remains ellusive, has been empirically verified in various other systems.

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