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Fractional Market Model and its verification on stock markets of small size

Marzena Kozłowska ,  Ryszard Kutner 

Warsaw University, Faculty of Physics, Hoża 69, Warszawa 00-681, Poland


We analysed the rising and relaxation of the cusp-like local peaks superposed with oscillations which were well defined by the Warsaw Stock Exchange index WIG in a daily time horizon. We found that the falling paths of all index peaks were described by a generalized exponential function or the Mittag-Leffler (ML) one superposed with various types of oscillations. However, the rising paths (except the first one of WIG which rises exponentially and the most important last one which rises again according to the ML function) can be better described by bullish anti-bubbles or inverted bubbles. The ML function superposed with oscillations is a solution of the nonhomogeneous fractional relaxation equation which defines here our Fractional Market Model (FMM) of index dynamics which can be also called the Rheological Model of Market. This solution is a generalized analog of an exactly solvable fractional version of the Standard or Zener Solid Model of viscoelastic materials commonly used in modern rheology. For example, we found that the falling paths of both indexes can be considered  to be a system in the intermediate state lying between two complex ones, definded by short- and long-time limits of the ML function; these limits are given by the Kohlrausch-Williams-Watts (KWW) law and the Nutting law, respectively. Some rising parts (i.e. the bullish anti-bubbles) are a kind of log-periodic oscillations of the market in the bullish state initiated by a crash. The peaks of the index can be viewed as precritical or precrash ones since: (i) the financial market changes its state too early from bullish to bearish one before it reaches a critical (scaling) region (defined by the diverging power-law of return per unit time), and (ii) they are affected by a finite size effect. These features could be a reminiscence of a significant risk aversion of the investors and their finite number, respectively. However, this means that the critical region (where the relaxations of index peaks are described by the KWW law or stretched exponential decay) was not observed. Hence, neither was the power-law of the instantaneous returns per unit time observed. Nevertheless, criticality or crash is in a natural way contained in our FMM and we found its 'finger print'.


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Related papers

Presentation: Oral at 3 Ogólnopolskie Sympozjum "Fizyka w Ekonomii i Naukach Społecznych", by Marzena Kozłowska
See On-line Journal of 3 Ogólnopolskie Sympozjum "Fizyka w Ekonomii i Naukach Społecznych"

Submitted: 2007-08-28 10:59
Revised:   2009-06-07 00:44