Introduction to Econophysics: Correlations and Complexity in Finance

Synopsis

Mantegna (physics, U. of Palermo) and Stanley (physics, Massachusetts Institute of Technology and Boston U.) draw on concepts from statistical physics to describe financial systems. Specifically they illustrate the scaling concepts used in probability theory, in critical phenomena, and in fully developed turbulent fluids, and apply them to financial time series to gain insight into the behavior of financial markets. They also present a new stochastic model that displays several of the statistical properties observed in empirical data. Annotation c. Book News, Inc., Portland, OR 

From the Publisher

Statistical physics concepts such as stochastic dynamics, short- and long-range correlations, self-similarity and scaling, permit an understanding of the global behavior of economic systems without first having to work out a detailed microscopic description of the system. This pioneering text explores the use of these concepts in the description of financial systems, the dynamic new specialty of econophysics. The authors illustrate the scaling concepts used in probability theory, critical phenomena, and fully-developed turbulent fluids and apply them to financial time series. They also present a new stochastic model that displays several of the statistical properties observed in empirical data. Physicists will find the application of statistical physics concepts to economic systems fascinating. Economists and other financial professionals will benefit from the book's empirical analysis methods and well-formulated theoretical tools that will allow them to describe systems composed of a huge number of interacting subsystems

Table of Contents

Preface
1 Introduction 1 
2 Efficient market hypothesis 8 
3 Random walk 14 
4 Levy stochastic processes and limit theorems 23 
5 Scales in financial data 34 
6 Stationarity and time correlation 44 
7 Time correlation in financial time series 53 
8 Stochastic models of price dynamics 60 
9 Scaling and its breakdown 68 
10 ARCH and GARCH processes 76 
11 Financial markets and turbulence 88 
12 Correlation and anticorrelation between stocks 98 
13 Taxonomy of a stock portfolio 105 
14 Options in idealized markets 113 
15 Options in real markets 123 
App. A Notation guide 130 
App. B Martingales 136 
 References 137 
 Index 145