Universal Behavior of Extreme Price Movements in Stock Markets
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.
Year of publication: |
2009-12-23
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Authors: | Fuentes, Miguel ; Gerig, Austin ; Vicente, Javier |
Saved in:
Online Resource
Type of publication: | Article |
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Language: | English |
Notes: | Fuentes, Miguel, Gerig, Austin and Vicente, Javier (2009) Universal Behavior of Extreme Price Movements in Stock Markets. Pl o S One, 4 (12). |
Other identifiers: | 10.1371/journal.pone.0008243 [DOI] |
Source: | BASE |
Persistent link: https://www.econbiz.de/10011424607
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