From the authors of manuscript XE10048E, to be published in Phys. Rev. E:
The physics of complexity helps one understand turbulent
financial markets.
Symmetry is loved by physicists because it makes the description of
our world simple and harmonious. This work shows that ideas inspired
by physics could also simplify the complex world of finance.
The historical changes in the price of financial assets present
similarities with variations in turbulent fluids. In spite of the
erratic, unpredictable character of these variations, in both cases
symmetry allows one to infer, from the knowledge of a distribution at
one time, the same distribution at other times.
Inspired by theoretical methods which led to the understanding of
this scaling symmetry in physics, we show that scaling alone can be
used as a guide for the construction of a model of asset price evolution.
Besides allowing one to evaluate financial risk or to price derivatives
on the basis of past market records, the novel description reproduces
key features of price histories in finance. In particular, it allows
one to discriminate between the past and future. There is an "arrow of
time".
Contact:
Matteo Rini
631 591 4224 (office)
646 288 5441 (cell)
mrini@aps.org
