Physics and financial economics (1776–2014): puzzles, Ising and agent-based models

@article{Sornette2014PhysicsAF,
  title={Physics and financial economics (1776–2014): puzzles, Ising and agent-based models},
  author={Didier Sornette},
  journal={Reports on Progress in Physics},
  year={2014},
  volume={77}
}
  • D. Sornette
  • Published 1 April 2014
  • Economics
  • Reports on Progress in Physics
This short review presents a selected history of the mutual fertilization between physics and economics—from Isaac Newton and Adam Smith to the present. The fundamentally different perspectives embraced in theories developed in financial economics compared with physics are dissected with the examples of the volatility smile and of the excess volatility puzzle. The role of the Ising model of phase transitions to model social and financial systems is reviewed, with the concepts of random… 

When Financial Economics Influences Physics: The Role of Econophysics

This paper aims at analyzing the unexpected influence of Financial economics on Physics. The rise of Econophysics, a fundamentally new approach in finance, suggests that the influence between the two

Structural model for fluctuations in financial markets.

TLDR
The model is able to substantiate one of the main hypotheses underlying the original modeling, viz., that the phenomenon of volatility clustering can be rationalized in terms of an interplay between the dynamics within metastable states and the dynamics of occasional transitions between them.

The History of Economics and the Pre-History of Econophysics: Boltzmann versus the Marginalists

Given the acknowledged influence of classical physics on the development of neoclassical economic theory, the emergence of the ‘new’ subject of econophysics in the mid-1990's poses a methodological

Mathematical Analogies: An Engine for Understanding the Transfers between Economics and Physics

Abstract The influence of physics on economics has been largely analysed; the opposite influence also exists even if it has been less studied. In the last decades the relation between these two

Can there be a physics of financial markets? Methodological reflections on econophysics

Abstract We address the question whether there can be a physical science of financial markets. In particular, we examine the argument that, given the reflexivity of financial markets (i.e., the

Financial markets and the phase transition between water and steam

  • C. Schmidhuber
  • Physics
    Physica A: Statistical Mechanics and its Applications
  • 2022

Model of cunning agents

  • M. Denys
  • Economics
    Physica A: Statistical Mechanics and its Applications
  • 2021

Stock markets: A view from soft matter.

TLDR
The physics of many-particle systems and the typical concepts of soft matter are used to study two sets of US and European stocks, comprising the biggest and most stable companies in terms of stock price and trading, indicating that the dynamics is much more complex than an ideal gas of Brownian particles, and similar, to some extent, to that of undercooled systems.

Equilibrium model of fundamentalist and noise traders in a multi-asset framework

Kaizoji et al. (2015) formulated an artificial market model which is able to reproduce financial bubbles with faster-than-exponential growth while fulfilling “stylized facts” of the financial market.
...

References

SHOWING 1-10 OF 384 REFERENCES

Econophysics review: I. Empirical facts

This article and the companion paper aim at reviewing recent empirical and theoretical developments usually grouped under the term Econophysics. Since the name was coined in 1995 by merging the words

Agent-based models of financial markets

This review deals with several microscopic (‘agent-based’) models of financial markets which have been studied by economists and physicists over the last decade: Kim–Markowitz, Levy–Levy–Solomon,

WHY STOCK MARKETS CRASH

TLDR
This essay attempts to capture and extend the essence of the book with the same title, which explains large-scale collective behavior, and predicts that financial crashes and depressions are intrinsic properties resulting from the repeated nonlinear interactions between investors.

Scaling and criticality in a stochastic multi-agent model of a financial market

Financial prices have been found to exhibit some universal characteristics that resemble the scaling laws characterizing physical systems in which large numbers of units interact. This raises the

Importance of Positive Feedbacks and Over-Confidence in a Self-Fulfilling Ising Model of Financial Markets

Following a long tradition of physicists who have noticed that the Ising model provides a general background to build realistic models of social interactions, we study a model of financial price

Power laws in economics and finance: some ideas from physics

We discuss several models in order to shed light on the origin of power-law distributions and power-law correlations in financial time series. From an empirical point of view, the exponents

An Introduction to Econophysics: Correlations and Complexity in Finance

TLDR
Economists and workers in the financial world will find useful the presentation of empirical analysis methods and well-formulated theoretical tools that might help describe systems composed of a huge number of interacting subsystems.

Stochastic behavioral asset pricing models and the stylized facts

Linking agent-based models and stochastic models of financial markets

TLDR
This work constructs an agent-based model to quantitatively demonstrate that “fat” tails in return distributions arise when traders share similar technical trading strategies and decisions and derives and explains a set of quantitative scaling relations of long-term memory from the empirical behavior of individual market participants.

Chapter 23 Heterogeneous Agent Models in Economics and Finance

...