Universal Behavior of Extreme Price Movements in Stock Markets

Fuentes, Miguel, Gerig, Austin and Vicente, Javier (2009) Universal Behavior of Extreme Price Movements in Stock Markets. Pl o S One, 4 (12).

Abstract

Many studies assume stock prices follow a random process known as geometric Brownian motion. Although approximately correct, this model fails to explain the frequent occurrence of extreme price movements, such as stock market crashes. Using a large collection of data from three different stock markets, we present evidence that a modification to the random model—adding a slow, but significant, fluctuation to the standard deviation of the process—accurately explains the probability of different-sized price changes, including the relative high frequency of extreme movements. Furthermore, we show that this process is similar across stocks so that their price fluctuations can be characterized by a single curve. Because the behavior of price fluctuations is rooted in the characteristics of volatility, we expect our results to bring increased interest to stochastic volatility models, and especially to those that can produce the properties of volatility reported here.

Item Type: Article
Keywords: Extremes; Stocks and shares; Stock Market; Models
Subject(s): Complexity
Centre: CABDyN Complexity Centre
Date Deposited: 25 Feb 2012 17:56
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/2726

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