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Stochastic volatility of financial markets as the fluctuating rate of trading: An empirical study

TitleStochastic volatility of financial markets as the fluctuating rate of trading: An empirical study
Publication TypeJournal Article
Year of Publication2007
AuthorsC. A. Silva, and V. M. Yakovenko
JournalPhysica A: Statistical Mechanics and its Applications
Volume382
Pagination278–285
Date Publishedaug
ISSN03784371
Keywords2007, Single Fellow
Abstract

We present an empirical study of the subordination hypothesis for a stochastic time series of a stock price. The fluctuating rate of trading is identified with the stochastic variance of the stock price, as in the continuous-time random walk (CTRW) framework. The probability distribution of the stock price changes (log-returns) for a given number of trades N is found to be approximately Gaussian. The probability distribution of N for a given time interval Dt is non-Poissonian and has an exponential tail for large N and a sharp cutoff for small N. Combining these two distributions produces a nontrivial distribution of log-returns for a given time interval Dt, which has exponential tails and a Gaussian central part, in agreement with empirical observations.

URLhttp://arxiv.org/abs/physics/0608299