Featured Research

from universities, journals, and other organizations

Analysis of financial markets using laws of molecular fluid dynamics

Date:
May 28, 2014
Source:
Tokyo Institute of Technology
Summary:
Scientists have develop an innovative new model to aid the analysis of financial markets uses the laws of molecular fluid dynamics to describe order-book transactions.

Misako Takayasu and colleagues have created a new model describing the fluctuations in an order-book for financial markets, using the laws of Brownian motion exhibited by particles in a fluid. The centre colloid particle (green and yellow) rests at the mid-price of a set of transactions. The range of price fluctuation is described by surrounding molecules (red and blue) which knock the mid-price up or down.
Credit: Image courtesy of Tokyo Institute of Technology

Misako Takayasu, associate professor at the Tokyo Institute of Technology, has dedicated her career to modelling such complex systems. Now, Takayasu and her colleagues in Japan and Switzerland have developed a novel way of describing the dynamics of the order books of financial markets, by linking the transaction patterns to the random motion of particles in a fluid.

The laws of mathematics and physics are often used to describe areas of complex statistics, such as the transactions in global financial markets. In particular, fractals -- self-similar patterns that replicate the same detailed structures at many scales -- can be used to help describe fluctuations in many different scenarios, including business transactions between millions of companies and the dynamics of internet traffic.

"We were asked to analyze the order book data of foreign exchange markets, specifically the US dollar-Japanese yen market," explains Takayasu. "To help understand such a massively complex data set we turned to fluid dynamics."

The order book of a financial market describes all orders, buying and selling, and includes all shifts in prices and volumes. Market prices are determined through these interactions. When a pair of buy and sell orders are of equal value, the transaction completes and the pair disappears from the order book -- rather like the annihilation that occurs when particles meet their antiparticles.

"The database shows the creation and annihilation of detailed orders -- a vast amount of information," explains Takayasu. "With layers of data to deal with, imagining the order-book as molecules of data moving randomly, similar to particles in fluid following the laws of Brownian motion, helped us to make sense of the data."

The researchers introduced a concept based on an imaginary colloid particle suspended in a fluid, at a location wherein the particle centre represents the mid-price of transactions (see image). The spread of possible prices for transactions are, in turn, represented by the surrounding fluid molecules. Whenever new orders are placed, the molecules change configuration and the main colloid particle shifts position.

The team completed their molecular analogy by implementing the laws that govern Brownian motion to observe and describe fluctuations in the market.


Story Source:

The above story is based on materials provided by Tokyo Institute of Technology. Note: Materials may be edited for content and length.


Journal Reference:

  1. Yoshihiro Yura, Hideki Takayasu, Didier Sornette, Misako Takayasu. Financial Brownian Particle in the Layered Order-Book Fluid and Fluctuation-Dissipation Relations. Physical Review Letters, 2014; 112 (9) DOI: 10.1103/PhysRevLett.112.098703

Cite This Page:

Tokyo Institute of Technology. "Analysis of financial markets using laws of molecular fluid dynamics." ScienceDaily. ScienceDaily, 28 May 2014. <www.sciencedaily.com/releases/2014/05/140528132536.htm>.
Tokyo Institute of Technology. (2014, May 28). Analysis of financial markets using laws of molecular fluid dynamics. ScienceDaily. Retrieved July 24, 2014 from www.sciencedaily.com/releases/2014/05/140528132536.htm
Tokyo Institute of Technology. "Analysis of financial markets using laws of molecular fluid dynamics." ScienceDaily. www.sciencedaily.com/releases/2014/05/140528132536.htm (accessed July 24, 2014).

Share This




More Matter & Energy News

Thursday, July 24, 2014

Featured Research

from universities, journals, and other organizations


Featured Videos

from AP, Reuters, AFP, and other news services

Robot Parking Valet Creates Stress-Free Travel

Robot Parking Valet Creates Stress-Free Travel

AP (July 23, 2014) 'Ray' the robotic parking valet at Dusseldorf Airport in Germany lets travelers to avoid the hassle of finding a parking spot before heading to the check-in desk. (July 23) Video provided by AP
Powered by NewsLook.com
Boeing Ups Outlook on 52% Profit Jump

Boeing Ups Outlook on 52% Profit Jump

Reuters - Business Video Online (July 23, 2014) Commercial aircraft deliveries rose seven percent at Boeing, prompting the aerospace company to boost full-year profit guidance- though quarterly revenues missed analyst estimates. Bobbi Rebell reports. Video provided by Reuters
Powered by NewsLook.com
Europe's Car Market on the Rebound?

Europe's Car Market on the Rebound?

Reuters - Business Video Online (July 23, 2014) Daimler kicks off a round of second-quarter earnings results from Europe's top carmakers with a healthy set of numbers - prompting hopes that stronger sales in Europe will counter weakness in emerging markets. Hayley Platt reports. Video provided by Reuters
Powered by NewsLook.com
9/11 Commission Members Warn of Terror "fatigue" Among American Public

9/11 Commission Members Warn of Terror "fatigue" Among American Public

Reuters - US Online Video (July 22, 2014) Ten years after releasing its initial report, members of the 9/11 Commission warn of the "waning sense of urgency" in combating terrorists attacks. Mana Rabiee reports. Video provided by Reuters
Powered by NewsLook.com

Search ScienceDaily

Number of stories in archives: 140,361

Find with keyword(s):
Enter a keyword or phrase to search ScienceDaily for related topics and research stories.

Save/Print:
Share:

Breaking News:
from the past week

In Other News

... from NewsDaily.com

Science News

Health News

Environment News

Technology News



Save/Print:
Share:

Free Subscriptions


Get the latest science news with ScienceDaily's free email newsletters, updated daily and weekly. Or view hourly updated newsfeeds in your RSS reader:

Get Social & Mobile


Keep up to date with the latest news from ScienceDaily via social networks and mobile apps:

Have Feedback?


Tell us what you think of ScienceDaily -- we welcome both positive and negative comments. Have any problems using the site? Questions?
Mobile: iPhone Android Web
Follow: Facebook Twitter Google+
Subscribe: RSS Feeds Email Newsletters
Latest Headlines Health & Medicine Mind & Brain Space & Time Matter & Energy Computers & Math Plants & Animals Earth & Climate Fossils & Ruins