Replicating financial market dynamics with a simple self-organized critical lattice model

We explore a simple lattice field model intended to describe statistical properties of high-frequency financial markets. The model is relevant in the cross-disciplinary area of econophysics. Its signature feature is the emergence of a self-organized critical state. This implies scale invariance of t...

Full description

Saved in:
Bibliographic Details
Published in:Physica A 2011-09, Vol.390 (18-19), p.3120-3135
Main Authors: Dupoyet, B., Fiebig, H.R., Musgrove, D.P.
Format: Article
Language:English
Subjects:
Econophysics
Financial markets
Gain
Lattices
Markets
Mathematical models
Self-organized criticality
Statistical field theory
Time series
Tuning
Volatility
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:We explore a simple lattice field model intended to describe statistical properties of high-frequency financial markets. The model is relevant in the cross-disciplinary area of econophysics. Its signature feature is the emergence of a self-organized critical state. This implies scale invariance of the model, without tuning parameters. Prominent results of our simulation are time series of gains, prices, volatility, and gains frequency distributions, which all compare favorably to features of historical market data. Applying a standard GARCH(1,1) fit to the lattice model gives results that are almost indistinguishable from historical NASDAQ data. ► Self-organized critical lattice model simulates prominent financial market features. ► Model yields fat tails of the gains distribution from its intrinsic dynamics. ► Gains time series exhibits volatility clustering. ► GARCH fits find model time series almost indistinguishable from real market data.
ISSN:0378-4371
1873-2119
DOI:10.1016/j.physa.2011.04.017