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A dynamical model describing stock market price distributions
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High-frequency data in finance have led to a deeper understanding on probability distributions of market prices. Several facts seem to be well established by empirical evidence. Specifically, probability distributions have the following properties: (i) They are not Gaussian and their center is well adjusted by Lévy distributions. (ii) They are long-tailed but have finite moments of any order. (iii) They are self-similar on many time scales. Finally, (iv) at small time scales, price volatility follows a non-diffusive behavior. We extend Merton's ideas on speculative price formation and present a dynamical model resulting in a characteristic function that explains in a natural way all of the above features. The knowledge of such a distribution opens a new and useful way of quantifying financial risk. The results of the model agree - with high degree of accuracy - with empirical data taken from historical records of the Standard & Poor's 500 cash index.
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MASOLIVER, Jaume, MONTERO TORRALBO, Miquel and PORRÀ I ROVIRA, Josep Maria. A dynamical model describing stock market price distributions. Physica A. 2000. Vol. 283, num. 3-4, pags. 559-567. ISSN 0378-4371. [consulted: 3 of August of 2026]. Available at: https://hdl.handle.net/2445/119287