TY - JOUR

T1 - Application of computational statistical physics to scale invariance and universality in economic phenomena

AU - Stanley, H. E.

AU - Amaral, L. A N

AU - Gopikrishnan, P.

AU - Plerou, V.

AU - Salinger, M. A.

PY - 2002/1/1

Y1 - 2002/1/1

N2 - This paper discusses some of the similarities between work being done by economists and by computational physicists seeking to contribute to economics. We also mention some of the differences in the approaches taken and seek to justify these different approaches by developing the argument that by approaching the same problem from different points of view, new results might emerge. In particular, we review two such new results. Specifically, we discuss the two newly-discovered scaling results that appear to be "universal", in the sense that they hold for widely different economies as well as for different time periods: (i) the fluctuation of price changes of any stock market is characterized by a probability density function (PDF), which is a simple power law with exponent -4 extending over 102 standard deviations (a factor of 108 on the y-axis); this result is analogous to the Gutenberg-Richter power law describing the histogram of earthquakes of a given strength; (ii) for a wide range of economic organizations, the histogram that shows how size of organization is inversely correlated to fluctuations in size with an exponent ≈ 0.2. Neither of these two new empirical laws has a firm theoretical foundation. We also discuss results that are reminiscent of phase transitions in spin systems, where the divergent behavior of the response function at the critical point (zero magnetic field) leads to large fluctuations. We discuss a curious "symmetry breaking" for values of Σ above a certain threshold value Σc; here Σ is defined to be the local first moment of the probability distribution of demand ω - the difference between the number of shares traded in buyer-initiated and seller-initiated trades. This feature is qualitatively identical to the behavior of the probability density of the magnetization for fixed values of the inverse temperature.

AB - This paper discusses some of the similarities between work being done by economists and by computational physicists seeking to contribute to economics. We also mention some of the differences in the approaches taken and seek to justify these different approaches by developing the argument that by approaching the same problem from different points of view, new results might emerge. In particular, we review two such new results. Specifically, we discuss the two newly-discovered scaling results that appear to be "universal", in the sense that they hold for widely different economies as well as for different time periods: (i) the fluctuation of price changes of any stock market is characterized by a probability density function (PDF), which is a simple power law with exponent -4 extending over 102 standard deviations (a factor of 108 on the y-axis); this result is analogous to the Gutenberg-Richter power law describing the histogram of earthquakes of a given strength; (ii) for a wide range of economic organizations, the histogram that shows how size of organization is inversely correlated to fluctuations in size with an exponent ≈ 0.2. Neither of these two new empirical laws has a firm theoretical foundation. We also discuss results that are reminiscent of phase transitions in spin systems, where the divergent behavior of the response function at the critical point (zero magnetic field) leads to large fluctuations. We discuss a curious "symmetry breaking" for values of Σ above a certain threshold value Σc; here Σ is defined to be the local first moment of the probability distribution of demand ω - the difference between the number of shares traded in buyer-initiated and seller-initiated trades. This feature is qualitatively identical to the behavior of the probability density of the magnetization for fixed values of the inverse temperature.

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U2 - 10.1016/S0010-4655(02)00438-1

DO - 10.1016/S0010-4655(02)00438-1

M3 - Article

AN - SCOPUS:0037097474

VL - 146

SP - 84

EP - 92

JO - Computer Physics Communications

JF - Computer Physics Communications

SN - 0010-4655

IS - 1

ER -