From: John Conover <john@email.johncon.com>
Subject: forwarded message from Jeff Brantingham
Date: 1 Nov 2001 22:15:12 -0000
Doyne Farmer, (one of the founders of the Prediction Company,
http://www.predict.com/html/introduction.html,) will be lecturing at
SFI on November 8, 2001, on the nearly random walk theory of stock
prices.
Skiing isn't that good in Santa Fe, (yet,) but if you need an excuse
to go to New Mexico, D. Farmer is an interesting lecturer.
John
BTW, of interest is the suggestion of a non-linear relationship
between price volatility and trading volume.
The "random walk was proposed a century ago" phrase refers to Louis
Bachelier's work on the theory of speculation, ("Theorie de la
Speculation",) http://cepa.newschool.edu/het/profiles/bachelier.htm,
which was his 1900 doctoral thesis, and was discounted by none other
than Henri Poincare, observing that "M. Bachelier has evidenced an
original and precise mind [but] the subject is somewhat remote from
those our other candidates are in the habit of treating," condemning
Bachelier to the backwaters of French academia. Today, the theory is
the foundation of Black-Scholes options/futures optimization, and is
the cornerstone of modern finance. See http://www.johncon.com/ntropix/
for further particulars.
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Message-Id: <Pine.GSO.4.10.10111011020190.9668-100000@pele>
Subject: SFI Colloquium Thursday, November 8, 3pm: "Understanding the nearly random walk of prices," Doyne Farmer
Date: Thu, 1 Nov 2001 10:21:14 -0700 (MST)
***SFI Colloquium Thursday, November 8, 2001, 3-4pm***
Location: Noyce Conference Room
Title: Understanding the nearly random walk of prices
Speaker: J. Doyne Farmer
Affiliation: SFI, McKinsey Professor
Abstract:
The theory that prices follow a random walk was proposed a century
ago, and although there are clearly some deviations, it remains an
important and useful approximation in financial economics. One of the
most basic properties of a random walk is its diffusion rate, which
for prices is called volatility. Given the long standing nature of
the random walk theory of prices, and its importance in finance, it is
surprising that the relation between volatility and other aspects of
markets is not at all understood. I will describe some data analysis
results (with Fabrizio Lillo and Rosario Mantegna) that indicate that
there is a simple and consistent nonlinear relation between volatility
and volume. I will also describe a theory of volatility and market
impact, developed jointly with Eric Smith, Giulia Iori, and Marcus
Daniels. We model the statistical properties of the order book, which
is a device used to store demand in financial markets. This theory
makes strong predictions relating price movements to other measurable
properties of markets, such as rates of order flow, under the
assumption of random trading. These results suggest that some basic
properties of markets can be explained by a theory much like
statistical mechanics, in which each trade imparts an impact to
prices, much like a molecular collision.
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John Conover, john@email.johncon.com, http://www.johncon.com/