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Financial markets as adaptative ecosystems

Marc Potters·Rama Cont·Jean-Philippe Bouchaud
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Abstract

We show, by studying in detail the market prices of options on liquid markets, that the market has empirically corrected the simple, but inadequate Black-Scholes formula to account for two important statistical features of asset fluctuations: `fat tails' and correlations in the scale of fluctuations. These aspects, although not included in the pricing models, are very precisely reflected in the price fixed by the market as a whole. Financial markets thus behave as rather efficient adaptive systems.

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Marc Potters, Rama Cont, Jean-Philippe Bouchaud. 1997-06-18. Financial markets as adaptative ecosystems. https://arxiv.org/abs/cond-mat/9609172

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