Kiel Working Papers, Kiel Institute for World Economics
No 1425:
Applications of Statistical Physics in Finance and Economics
Thomas Lux
Abstract: This chapter reviews recent research adopting methods from
statistical physics in theoretical or empirical work in economics and
finance. The bulk of what has recently become known as 'econophysics' in
broader circles draws its motivation from observed scaling laws in
financial markets and the abundance of data available from the economy's
financial sphere. Sec. 2 of this review presents the robust power laws
encountered in financial economics and discusses potential explanations for
scaling in finance derived from models of stochastic interactions of
traders. Sec. 3 provides an overview over other applications of statistical
physics methodology in finance and attempts to evaluate the impact they
have had so far on financial economics. With the following section, the
review turns to recent work on the emergence of wealth and income
heterogeneity and the recent inception of new strands of research on this
topic, both within econophysics and the neoclassical economics tradition.
Sec. 5 reviews the new stylized facts that have been identified in
cross-sectional data of firm characteristics and agent-based approaches to
industrial organization and macroeconomic dynamics that have been motivated
by these findings. We conclude with an assessment of the major
methodological contributions of this new strand of research
Keywords: stylized facts, power laws, agent-based models, econophysics; (follow links to similar papers)
JEL-Codes: C10,; C51,; G12; (follow links to similar papers)
69 pages, June 2008
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