Saturday, March 15, 2014

Financial Brownian particle in the layered order book fluid and Fluctuation-Dissipation relations

In summary, we have established a fundamental analogy between the motion of a colloidal particle embedded in a fluid and the price dynamics of a financial market in the order book  By observing the detailed behaviors of the colloid and surrounding particles in the order book, we found that the drag resistance is caused by particles moving from the outer-layer to the inner-layer. The proposed quantitative correspondence provides a novel perspective for the analysis of financial markets. In addition, it should provide a stimulus for physicists from many different fields, since the question of the origin of drag resistance is a fundamental question in physics that still remains to be fully clarified. We also showed the need to enhance the analysis by accounting for the non-stationary properties of markets. Moreover, there are some market conditions when we find that Knudsen number becomes close to 1, requiring to extend the continuous description (2) into a discrete representation. Our approach demonstrates the importance of physical intuition associated with financial insights to analyze big data of financial markets.

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