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arXiv · 1703.06739

Derivation of the Boltzmann Equation for Financial Brownian Motion: Direct Observation of the Collective Motion of High-Frequency Traders

Kiyoshi Kanazawa·Takumi Sueshige·Hideki Takayasu·Misako Takayasu
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Abstract

A microscopic model is established for financial Brownian motion from the direct observation of the dynamics of high-frequency traders (HFTs) in a foreign exchange market. Furthermore, a theoretical framework parallel to molecular kinetic theory is developed for the systematic description of the financial market from microscopic dynamics of HFTs. We report first on a microscopic empirical law of traders' trend-following behavior by tracking the trajectories of all individuals, which quantifies the collective motion of HFTs but has not been captured in conventional order-book models. We next introduce the corresponding microscopic model of HFTs and present its theoretical solution paralleling molecular kinetic theory: Boltzmann-like and Langevin-like equations are derived from the microscopic dynamics via the Bogoliubov-Born-Green-Kirkwood-Yvon hierarchy. Our model is the first microscopic model that has been directly validated through data analysis of the microscopic dynamics, exhibiting quantitative agreements with mesoscopic and macroscopic empirical results.

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Kiyoshi Kanazawa, Takumi Sueshige, Hideki Takayasu, Misako Takayasu. 2017-03-06. Derivation of the Boltzmann Equation for Financial Brownian Motion: Direct Observation of the Collective Motion of High-Frequency Traders. https://doi.org/10.1103/physrevlett.120.138301

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