Fluctuations and response in financial markets

The subtle nature of 'random' price changes

Jean Philippe Bouchaud, Yuval Gefen, Marc Potters, Matthieu Wyart

    Research output: Contribution to journalArticle

    Abstract

    Using trades and quotes data from the Paris stock market, we show that the random walk nature of traded prices results from a very delicate interplay between two opposite tendencies: long-range correlated market orders that lead to super-diffusion (or persistence), and mean reverting limit orders that lead to sub-diffusion (or anti-persistence). We define and study a model where the price, at any instant, is the result of the impact of all past trades, mediated by a non-constant 'propagator' in time that describes the response of the market to a single trade. Within this model, the market is shown to be, in a precise sense, at a critical point, where the price is purely diffusive and the average response function almost constant. We find empirically, and discuss theoretically, a fluctuation-response relation. We also discuss the fraction of truly informed market orders, that correctly anticipate short-term moves, and find that it is quite small.

    Original languageEnglish (US)
    Pages (from-to)176-190
    Number of pages15
    JournalQuantitative Finance
    Volume4
    Issue number2
    DOIs
    StatePublished - Apr 2004

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    Financial markets
    Price changes
    Fluctuations
    Persistence
    Market order
    Stock market
    Mean-reverting
    Limit orders
    Critical point
    Random walk

    ASJC Scopus subject areas

    • Economics, Econometrics and Finance(all)

    Cite this

    Fluctuations and response in financial markets : The subtle nature of 'random' price changes. / Bouchaud, Jean Philippe; Gefen, Yuval; Potters, Marc; Wyart, Matthieu.

    In: Quantitative Finance, Vol. 4, No. 2, 04.2004, p. 176-190.

    Research output: Contribution to journalArticle

    Bouchaud, Jean Philippe ; Gefen, Yuval ; Potters, Marc ; Wyart, Matthieu. / Fluctuations and response in financial markets : The subtle nature of 'random' price changes. In: Quantitative Finance. 2004 ; Vol. 4, No. 2. pp. 176-190.
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