6533b829fe1ef96bd1289b24
RESEARCH PRODUCT
The non-random walk of stock prices: The long-term correlation between signs and sizes
J. Doyne FarmerFabrizio LilloGabriele La Spadasubject
Physics - Physics and Societybusiness and managementFOS: Physical sciencesEconomicPhysics and Society (physics.soc-ph)01 natural sciences010305 fluids & plasmasCorrelationFOS: Economics and businessStochastic processes0103 physical sciencesEconometricsfinancial market010306 general physicsStock (geology)MathematicsStatistical Finance (q-fin.ST)ShufflingMarket efficiencyQuantitative Finance - Statistical FinanceCondensed Matter PhysicsRandom walkElectronic Optical and Magnetic MaterialsVolatility (finance)Brownian motioneconophysicLong term correlationdescription
We investigate the random walk of prices by developing a simple model relating the properties of the signs and absolute values of individual price changes to the diffusion rate (volatility) of prices at longer time scales. We show that this benchmark model is unable to reproduce the diffusion properties of real prices. Specifically, we find that for one hour intervals this model consistently over-predicts the volatility of real price series by about 70%, and that this effect becomes stronger as the length of the intervals increases. By selectively shuffling some components of the data while preserving others we are able to show that this discrepancy is caused by a subtle but long-range non-contemporaneous correlation between the signs and sizes of individual returns. We conjecture that this is related to the long-memory of transaction signs and the need to enforce market efficiency.
| year | journal | country | edition | language |
|---|---|---|---|---|
| 2007-11-28 |