Talk:Statistical finance

The above description of financial markets is faulty, it reflects largely wishful thinking on the part of the writer and does not at all correspond to what we know about real finance markets. First, traders create largely noise, not long range correlations among themselves. And, first, a market is not at an equilibrium critical point, the resulting nonequilibrium market must reflect details of traders' interactions (universality applies only to a limited very class of bifurcations, and the market does not sit at a bifurcation). The market does not 'self-organize' into a stable statistical equilibrium, rather, markets are unstable. Complex systems have never been defined, the Tsallis ideology has been thoroughly discredited and does not fit market data at all, when the data are correctly analyzed. In addition, the standard 'stylized factss' of financial markets, fat tails, scaling, and universality are not observed in real FX markets.

Reference: Kevin E. Bassler, Joseph L. McCauley, and Gemunu H. Gunaratne, Nonstationary increments, scaling distributions, and variable diffusion processes in financial markets PNAS 2007 104: 17287-17290; published online before print October 23 2007.

That financial markets constituted examples complex adaptive systems is in general accepted even though there is no agreed upon definition of complex systems. The stylized facts are not themselves considered speculative as they are based on measurements of actual data in a variety of equity markets. The suggestion that much of the price dynamics in real markets could be emergent as opposed to be directly linked in a linear manner to agent behaviour or rational expectations, although speculative, has not be ruled out by observation ["Financial Market Complexity" - Johnson, Jefferies and Hui, Oxford 2003]. That traders largely create noise depends on time-scales, liquidity, market micro-structure and the instruments being traded. It seems unlikely that individual trader interactions must be reflected in the resulting market dynamics in a meaningful manner all the time, or even most of the time; except perhaps on very short time-scales, because of the interactions between the market-makers and the various traders ["Market Microstructure Theory" - O'Hara, Blackwell, 1997]. The claims that a market self-organizes into a stable statistical equilibrium is very speculative [where have such claims being made in the literature? Nor are they made in the stub] and not support by real data; however there are claims that there are periods and time-scales over-which the markets have self-organized in some way ["Why Financial Market Crash", Sornette, Princeton, 2003] and so raise questions relating to universality of market correction phenomenology in various markets. Speculative ideas relating to spin networks have been used to question the nature of and mechanism that could generate many market equilibria [Noh, J., D., A model for correlations in Stock Markets, Physical Review E, 61, 5981, Bornholdt, S., (2001) Expectation bubbles in a spin model of markets: Intermittency from frustration across scales, International Journal of Modern Physics C, 12, 667].

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