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 journalArticlepeer-review

    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 - 2004

    ASJC Scopus subject areas

    • Finance
    • Economics, Econometrics and Finance(all)

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