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Related Experiment Videos

Quantifying stock-price response to demand fluctuations.

Vasiliki Plerou1, Parameswaran Gopikrishnan, Xavier Gabaix

  • 1Center for Polymer Studies and Department of Physics, Boston University, Boston, Massachusetts 02215, USA.

Physical Review. E, Statistical, Nonlinear, and Soft Matter Physics
|September 21, 2002
PubMed
Summary

Stock prices react to demand changes with a market impact function that is concave and universal across stocks. Large price swings occur with minimal demand, similar to critical phenomena in physics.

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Area of Science:

  • Quantitative Finance
  • Market Microstructure
  • Statistical Physics

Background:

  • Understanding stock price dynamics is crucial for financial markets.
  • Empirical analysis of demand's role in price fluctuations is essential.

Purpose of the Study:

  • To investigate the relationship between stock price changes and demand fluctuations.
  • To quantify the market impact function based on trade data.

Main Methods:

  • Analyzing stock price changes (G) over time intervals (Δt).
  • Quantifying demand using buyer- vs. seller-initiated trades (Φ) and trade volume (Ω).
  • Modeling the conditional expectation of price change as a function of demand ((Φ), (Ω)).

Main Results:

Related Experiment Videos

  • Identified concave functional forms for market impact functions ((Φ), (Ω)) universal across stocks.
  • Observed power-law behavior (Ω) ∝ Ω^(1/8) for small Ω, with exponents dependent on Δt.
  • Found that minimal demand correlates with significant price fluctuations, analogous to critical points in physical systems.

Conclusions:

  • Demand fluctuations significantly influence stock price movements through a predictable market impact function.
  • The observed universal behavior and power-law dynamics offer insights into market efficiency and volatility.
  • The analogy to critical phenomena suggests potential for advanced modeling of financial markets.