arXiv subjects

Jean-Philippe Bouchaud

Publications and source records attributed to Jean-Philippe Bouchaud.

At least 181 records · Page 10Linked to original sources

arXiv2011

Models for the impact of all order book events

We propose a general framework to describe the impact of different events in the order book, that generalizes previous work on the impact of market orders. Two different modeling routes can be considered, which are equivalent when only market orders are taken into account. One model posits that each event type has a temporary impact (TIM). The "history dependent impact" model (HDIM), on the other hand, assumes that only price-changing events have a direct impact, itself modulated by the past history of all events through an "influence matrix" that measures how much, on average, an event of a given type affects the immediate impact of a price-changing event of the same sign in the future. We find in particular that aggressive market orders tend to reduce the impact of further aggressive market orders of the same sign (and increase the impact of aggressive market orders of opposite sign). We discuss the relative merits of TIM and HDIM, in particular concerning their ability to reproduce accurately the price diffusion pattern. We find that in spite of theoretical inconsistencies, TIM appears to fare better than HDIM when compared to empirical data. We ascribe this paradox to an uncontrolled approximation used to calibrate HDIMs, calling for further work on this issue.

q-fin.TR↗

arXiv2011

Erratum for: Smile dynamics -- a theory of the implied leverage effect

We correct a mistake in the published version of our paper. Our new conclusion is that the "implied leverage effect" for single stocks is underestimated by option markets for short maturities and overestimated for long maturities, while it is always overestimated for OEX options, except for the shortest maturities where the revised theory and data match perfectly.

q-fin.PR↗

arXiv2011

Principal Regression Analysis and the index leverage effect

We revisit the index leverage effect, that can be decomposed into a volatility effect and a correlation effect. We investigate the latter using a matrix regression analysis, that we call `Principal Regression Analysis' (PRA) and for which we provide some analytical (using Random Matrix Theory) and numerical benchmarks. We find that downward index trends increase the average correlation between stocks (as measured by the most negative eigenvalue of the conditional correlation matrix), and makes the market mode more uniform. Upward trends, on the other hand, also increase the average correlation between stocks but rotates the corresponding market mode {\it away} from uniformity. There are two time scales associated to these effects, a short one on the order of a month (20 trading days), and a longer time scale on the order of a year. We also find indications of a leverage effect for sectorial correlations as well, which reveals itself in the second and third mode of the PRA.

q-fin.ST↗

arXiv2010

Overview of different characterisations of dynamic heterogeneity

Dynamic heterogeneity is now recognised as a central aspect of structural relaxation in disordered materials with slow dynamics, and was the focus of intense research in the last decade. Here we describe how initial, indirect observations of dynamic heterogeneity have recently evolved into well-defined, quantitative, statistical characterisations, in particular through the use of high-order correlation and response functions. We highlight both recent progress and open questions about the characterisation of dynamic heterogeneity in glassy materials. We also discuss the limits of available tools and describe a few candidates for future research in order to gain deeper understanding of the origin and nature of glassiness in disordered systems.

cond-mat.stat-mech↗

arXiv2010

Individual and collective stock dynamics: intra-day seasonalities

We establish several new stylised facts concerning the intra-day seasonalities of stock dynamics. Beyond the well known U-shaped pattern of the volatility, we find that the average correlation between stocks increases throughout the day, leading to a smaller relative dispersion between stocks. Somewhat paradoxically, the kurtosis (a measure of volatility surprises) reaches a minimum at the open of the market, when the volatility is at its peak. We confirm that the dispersion kurtosis is a markedly decreasing function of the index return. This means that during large market swings, the idiosyncratic component of the stock dynamics becomes sub-dominant. In a nutshell, early hours of trading are dominated by idiosyncratic or sector specific effects with little surprises, whereas the influence of the market factor increases throughout the day, and surprises become more frequent.

q-fin.ST↗

arXiv2010

The price impact of order book events: market orders, limit orders and cancellations

While the long-ranged correlation of market orders and their impact on prices has been relatively well studied in the literature, the corresponding studies of limit orders and cancellations are scarce. We provide here an empirical study of the cross-correlation between all these different events, and their respective impact on future price changes. We define and extract from the data the "bare" impact these events would have, if they were to happen in isolation. For large tick stocks, we show that a model where the bare impact of all events is permanent and non-fluctuating is in good agreement with the data. For small tick stocks, however, bare impacts must contain a history dependent part, reflecting the internal fluctuations of the order book. We show that this effect can be accurately described by an autoregressive model on the past order flow. This framework allows us to decompose the impact of an event into three parts: an instantaneous jump component, the modification of the future rates of the different events, and the modification of the future gaps behind the best quotes. We compare in detail the present formalism with the temporary impact model that was proposed earlier to describe the impact of market orders when other types of events are not observed. Finally, we extend the model to describe the dynamics of the bid-ask spread.

q-fin.TR↗

arXiv2010

The endogenous dynamics of markets: price impact and feedback loops

We review the evidence that the erratic dynamics of markets is to a large extent of endogenous origin, i.e. determined by the trading activity itself and not due to the rational processing of exogenous news. In order to understand why and how prices move, the joint fluctuations of order flow and liquidity - and the way these impact prices - become the key ingredients. Impact is necessary for private information to be reflected in prices, but by the same token, random fluctuations in order flow necessarily contribute to the volatility of markets. Our thesis is that the latter contribution is in fact dominant, resulting in a decoupling between prices and fundamental values, at least on short to medium time scales. We argue that markets operate in a regime of vanishing revealed liquidity, but large latent liquidity, which would explain their hyper-sensitivity to fluctuations. More precisely, we identify a dangerous feedback loop between bid-ask spread and volatility that may lead to micro-liquidity crises and price jumps. We discuss several other unstable feedback loops that should be relevant to account for market crises: imitation, unwarranted quantitative models, pro-cyclical regulation, etc.

q-fin.ST↗

arXiv2010

Spatial correlations in vote statistics: a diffusive field model for decision-making

We study the statistics of turnout rates and results of the French elections since 1992. We find that the distribution of turnout rates across towns is surprisingly stable over time. The spatial correlation of the turnout rates, or of the fraction of winning votes, is found to decay logarithmically with the distance between towns. Based on these empirical observations and on the analogy with a two-dimensional random diffusion equation, we propose that individual decisions can be rationalised in terms of an underlying "cultural" field, that locally biases the decision of the population of a given region, on top of an idiosyncratic, town-dependent field, with short range correlations. Using symmetry considerations and a set of plausible assumptions, we suggest that this cultural field obeys a random diffusion equation.

physics.soc-ph↗

arXiv2010

Elementary Excitation Modes in a Granular Glass above Jamming

The dynamics of granular media in the jammed, glassy region is described in terms of "modes", by applying a Principal Component Analysis (PCA) to the covariance matrix of the position of individual grains. We first demonstrate that this description is justified and gives sensible results in a regime of time/densities such that a metastable state can be observed on long enough timescale to define the reference configuration. For small enough times/system sizes, or at high enough packing fractions, the spectral properties of the covariance matrix reveals large, collective fluctuation modes that cannot be explained by a Random Matrix benchmark where these correlations are discarded. We then present a first attempt to find a link between the softest modes of the covariance matrix during a certain "quiet" time interval and the spatial structure of the rearrangement event that ends this quiet period. The motion during these cracks is indeed well explained by the soft modes of the dynamics before the crack, but the number of cracks preceded by a "quiet" period strongly reduces when the system unjams, questioning the relevance of a description in terms of modes close to the jamming transition, at least for frictional grains.

cond-mat.soft↗

arXiv2009

Anomalous non-linear response of glassy liquids: general arguments and a Mode-Coupling approach

We study theoretically the non-linear response properties of glass formers. We establish several general results which, together with the assumption of Time-Temperature Superposition, lead to a relation between the non-linear response and the derivative of the linear response with respect to temperature. Using results from Mode-Coupling Theory (MCT) and scaling arguments valid close to the glass transition, we obtain the frequency and temperature dependence of the non-linear response in the $α$ and $β$-regimes. Our results demonstrate that supercooled liquids are characterized by responses to external perturbations that become increasingly non-linear as the glass transition is approached. These results are extended to the case of inhomogeneous perturbing fields.

cond-mat.stat-mech↗

arXiv2009

Predictive power of MCT: Numerics and Finite size scaling for a mean field spin glass

The aim of this paper is to test numerically the predictions of the Mode Coupling Theory (MCT) of the glass transition and study its finite size scaling properties in a model with an exact MCT transition, which we choose to be the fully connected Random Orthogonal Model. Surprisingly, some predictions are verified while others seem clearly violated, with inconsistent values of some MCT exponents. We show that this is due to strong pre-asymptotic effects that disappear only in a surprisingly narrow region around the critical point. Our study of Finite Size Scaling (FSS) show that standard theory valid for pure systems fails because of strong sample to sample fluctuations. We propose a modified form of FSS that accounts well for our results. {\it En passant,} we also give new theoretical insights about FSS in disordered systems above their upper critical dimension. Our conclusion is that the quantitative predictions of MCT are exceedingly difficult to test even for models for which MCT is exact. Our results highlight that some predictions are more robust than others. This could provide useful guidance when dealing with experimental data.

cond-mat.dis-nn↗

arXiv2009

The (unfortunate) complexity of the economy

This article is a follow-up of a short essay that appeared in Nature 455, 1181 (2008) [arXiv:0810.5306]. It has become increasingly clear that the erratic dynamics of markets is mostly endogenous and not due to the rational processing of exogenous news. I elaborate on the idea that spin-glass type of problems, where the combination of competition and heterogeneities generically leads to long epochs of statis interrupted by crises and hyper-sensitivity to small changes of the environment, could be metaphors for the complexity of economic systems. I argue that the most valuable contribution of physics to economics might end up being of methodological nature, and that simple models from physics and agent based numerical simulations, although highly stylized, are more realistic than the traditional models of economics that assume rational agents with infinite foresight and infinite computing abilities.

q-fin.GN↗

arXiv2008

Economics need a scientific revolution

I argue that the current financial crisis highlights the crucial need of a change of mindset in economics and financial engineering, that should move away from dogmatic axioms and focus more on data, orders of magnitudes, and plausible, albeit non rigorous, arguments.

q-fin.GN↗

arXiv2008

Smile dynamics -- a theory of the implied leverage effect

We study in details the skew of stock option smiles, which is induced by the so-called leverage effect on the underlying -- i.e. the correlation between past returns and future square returns. This naturally explains the anomalous dependence of the skew as a function of maturity of the option. The market cap dependence of the leverage effect is analyzed using a one-factor model. We show how this leverage correlation gives rise to a non-trivial smile dynamics, which turns out to be intermediate between the "sticky strike" and the "sticky delta" rules. Finally, we compare our result with stock option data, and find that option markets overestimate the leverage effect by a large factor, in particular for long dated options.

q-fin.PR↗

arXiv2008

Optimal Time to Sell a Stock in Black-Scholes Model: Comment on "Thou shall buy and hold", by A. Shiryaev, Z. Xu and X.Y. Zhou

We reconsider the problem of optimal time to sell a stock studied recently by Shiryaev, Xu and Zhou using path integral methods. This method allows us to confirm the results obtained by these authors and extend them to a parameter region inaccessible to the method used by Shiryaev et. al. We also obtain the full distribution of the time t_m at which the maximum of the price is reached for arbitrary values of the drift.

q-fin.PR↗

arXiv2008

How markets slowly digest changes in supply and demand

In this article we revisit the classic problem of tatonnement in price formation from a microstructure point of view, reviewing a recent body of theoretical and empirical work explaining how fluctuations in supply and demand are slowly incorporated into prices. Because revealed market liquidity is extremely low, large orders to buy or sell can only be traded incrementally, over periods of time as long as months. As a result order flow is a highly persistent long-memory process. Maintaining compatibility with market efficiency has profound consequences on price formation, on the dynamics of liquidity, and on the nature of impact. We review a body of theory that makes detailed quantitative predictions about the volume and time dependence of market impact, the bid-ask spread, order book dynamics, and volatility. Comparisons to data yield some encouraging successes. This framework suggests a novel interpretation of financial information, in which agents are at best only weakly informed and all have a similar and extremely noisy impact on prices. Most of the processed information appears to come from supply and demand itself, rather than from external news. The ideas reviewed here are relevant to market microstructure regulation, agent-based models, cost-optimal execution strategies, and understanding market ecologies.

q-fin.TR↗

arXiv2008

Statistical mechanics of a single particle in a multiscale random potential: Parisi landscapes in finite dimensional Euclidean spaces

We construct a N-dimensional Gaussian landscape with multiscale, translation invariant, logarithmic correlations and investigate the statistical mechanics of a single particle in this environment. In the limit of high dimension N>>1 the free energy of the system and overlap function are calculated exactly using the replica trick and Parisi's hierarchical ansatz. In the thermodynamic limit, we recover the most general version of the Derrida's Generalized Random Energy Model (GREM). The low-temperature behaviour depends essentially on the spectrum of length scales involved in the construction of the landscape. If the latter consists of K discrete values, the system is characterized by a K-step Replica Symmetry Breaking solution. We argue that our construction is in fact valid in any finite spatial dimensions $N\ge 1$. We discuss implications of our results for the singularity spectrum describing multifractality of the associated Boltzmann-Gibbs measure. Finally we discuss several generalisations and open problems, the dynamics in such a landscape and the construction of a Generalized Multifractal Random Walk.

cond-mat.dis-nn↗

arXiv2008

Freezing and extreme value statistics in a Random Energy Model with logarithmically correlated potential

We investigate some implications of the freezing scenario proposed by Carpentier and Le Doussal (CLD) for a random energy model (REM) with logarithmically correlated random potential. We introduce a particular (circular) variant of the model, and show that the integer moments of the partition function in the high-temperature phase are given by the well-known Dyson Coulomb gas integrals. The CLD freezing scenario allows one to use those moments for extracting the distribution of the free energy in both high- and low-temperature phases. In particular, it yields the full distribution of the minimal value in the potential sequence. This provides an explicit new class of extreme-value statistics for strongly correlated variables, manifestly different from the standard Gumbel class. -

cond-mat.dis-nn↗