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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(More)
NOTE: Staff working papers in the DERA Working Paper Series are preliminary materials circulated to stimulate discussion and critical comment. References in publications to the DERA Working Paper Series (other than acknowledgement) should be cleared with the author(s) in light of the tentative character of these papers. The Securities and Exchange(More)
Despite the idiosyncratic behavior of individuals, empirical regularities exist in social and economic systems. These regularities often arise from simple underlying mechanisms which, analogous to the natural sciences, can be expressed as universal principles or laws. In this essay, I discuss the similarities between economic and natural phenomena and argue(More)
Newton's second law describes the motion of the center of mass of most objects that we encounter in everyday life, including the complex motion of a spoon when we eat, the acceleration of a car, and even the trajectories of planets and stars. Only if objects move extremely fast, do we need to replace Newton's second law with Einstein's theory of relativity,(More)
We study the price change associated with the incremental execution of large trading orders. The heavy tails of large order sizes leads to persistence in the signs of transactions: Buyer initiated transactions tend to be followed by buyer initiated transactions and seller initiated transactions tend to be followed by seller initiated transactions. The(More)
Market impact is the change in price due to initiating a trade. In this paper we develop a new theory for average market impact based on properties of order flow, efficiency of price returns and other empirically testable assumptions. Our approach differs from previous efforts in that our results do not depend on assumptions about the functional form of(More)
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