Eisler, Zoltán. 2007. Fluctuation
Phenomena on the Stock Market. Ph.D. Thesis, Budapest University of
Technology and Economics.
In the last decade tens of books
and thousands of research papers have been published by physicists in the field
of finance. Such publication records reflect the conviction that these and
similar ideas and techniques will be helpful to understand the mechanisms of
the economy [BP00, MS99, Man97]. This new trend is only one of many fueled by
the break- through of the early 70’s in statistical physics. The advances of
this period brought up several concepts and models like scaling, frustrated
disordered systems, or far from equilibrium phenomena and we have obtained very
efficient tools to treat them. But how reliable can insights be if they are
based on principles that apply to particles and we would like to extend them to
social or economic systems?
A generalization of ideas from
physics to finance is, the least to say, counter intuitive. Physics is the
science of clearly defined natural forces that are unchanged in time, can be
isolated with sufficient care, and can be experimented with. Finance is often
very pragmatic and less of a science than an art. Moreover, ”experiments” on
the stock market can be extremely costly, if at all possible, so one has to be
satisfied with passive observation instead. Finally, the economy is never in a
steady state, its characteristics change without end, and it is difficult to
understand why and for how long any non-trivial observation remains valid. The
current level of understanding is also very different between the two fields.
While physics has some generally accepted models that have very good predictive
power, no such models exist for human behavior and the financial markets that
it controls.
This is not to say that economics
lacks abundant theoretical background, but when contrasted with each other, the
neoclassical economic theory and the way physicists look at markets (or physics
itself for that matter) are worlds apart. Physicists are extremely critical of
economics and they feel that the theory does not put enough emphasis on
consistency with the observations.
Despite all these conflicts it
appears that physics, or as this area is sometimes called ”econophysics”, indeed has a contribution to make. At this point
such a contribution is not as much to solving key questions that thrill economists
as to providing innovative techniques to look at financial data. These
techniques appear to be welcome by practitioners in banking and investment, but
it is clear, that there is much room for improvement. And naturally,
physicists already have their eyes on a more ambitious goal: a ”microscopic”
theory of markets, as much as quantum mechanics is a microscopic theory of
matter. Even though no one can tell whether there is any hope for one, there is
a lot to gain from still trying.
This thesis has been the product
of more than three years of research which hoped to contribute to these early
efforts. Beyond statistical finance, it was inspired by several other areas in
complex systems, such as complex networks, random processes and population
dynamics. While this manuscript attempts to give a broader overview of
financial fluctuations, it has a clear focus on three subjects: financial data
and non-universality, the scaling properties of fluctuations, and the temporal
dynamics of the limit order book. This is why I decided to include three
separate chapters discussing the respective background information, these are
called ”Introduction” which is more general, ”Introduction to fluctuation
scaling” and ”Introduction to order books”. The remaining chapters
contain my own results.
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