Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more
Download
Standard view
Full view
of .
Look up keyword
Like this
6Activity
0 of .
Results for:
No results containing your search query
P. 1
Mandelbrot Variations

Mandelbrot Variations

Ratings: (0)|Views: 85|Likes:
Published by JimmyJimmington

More info:

Published by: JimmyJimmington on Nov 18, 2009
Copyright:Attribution Non-commercial

Availability:

Read on Scribd mobile: iPhone, iPad and Android.
download as PDF, TXT or read online from Scribd
See more
See less

02/24/2013

pdf

text

original

 
The Variation of Certain Speculative PricesAuthor(s): Benoit MandelbrotSource:
The Journal of Business,
Vol. 36, No. 4 (Oct., 1963), pp. 394-419Published by: The University of Chicago PressStable URL:
Accessed: 17/11/2009 12:59
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available athttp://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unlessyou have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and youmay use content in the JSTOR archive only for your personal, non-commercial use.Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained athttp://www.jstor.org/action/showPublisher?publisherCode=ucpress.Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact support@jstor.org.
The University of Chicago Press
is collaborating with JSTOR to digitize, preserve and extend access to
The Journal of Business.
http://www.jstor.org
 
THE VARIATION OF CERTAINSPECULATIVE PRICES*
BENOITMANDELBROTtI. INTRODUCTION
Ename
of Louis Bachelieris oftenmentionedin booksondiffusionprocess.Untilvery recently,how-ever,fewpeoplerealized thathisearly(1900)and path-breakingcontributionwasthe constructionof a random-walkmodelfor securityand commoditymar-kets.' Bachelier's simplestandmost im-portantmodelgoesas follows: etZ(t)bethe priceof astock,or ofa unit of acom-modity, at the end of time period t. Thenit is assumed that successive differencesof theformZ(t + T)
-
Z(t) are inde-pendent, Gaussianornormally distrib-uted, random variables with zero meanand variance proportionalto the differ-encing intervalT.2Despite the fundamental importanceof Bachelier'sprocess,which hascometobecalled"Brownianmotion,"itisnowobviousthatitdoesnotaccountfor theabundantdata accumulated since 1900by empiricaleconomists, simplybecausethe empiricaldistributions f price changesare usuallytoo"peaked"obe relative osamples romGaussianpopulations.3That
*The theorydevelopedn this paper sa naturalcontinuationofmystudyof the distributionofin-come.I wasstill workingn the latterwhenHendrikS.Houthakkerdirected myinteresttowardthedistributionfpricechanges.Thepresentmodelwasthus suggestedbyHouthakker'sdata;it wasdis-cussedwithhim allalongand was firstpubliclypresentedat hisseminar.thereforewehim agreatdebtofgratitude.The extensivecomputationsrequired by thisworkwereperformedn the7090computeroftheI.B.M.ResearchCenterandweremostly pro-grammedbyN.J.Anthony,R.Coren,and F. L.Zarnfaller.Many ofthe datawhichIhaveusedweremostkindlysuppliedbyF.LowensteinndJ. Don-aldofthe EconomicStatisticssection ofthe UnitedStatesDepartmentofAgriculture.Somestages ofthepresentworkweresupportednpartbytheOfficeofNavalResearch,under contract numberNonr-3775(00),NR-047040.
t
HarvardUniversityand ResearchCenterof theInternationalBusinessMachinesCorporation.1The materialsof this paperwill be includedngreaterdetail nmybook entativelyitledStudies n
Speculation,Economics,andStatistics,tobepub-
lishedwithin ayear byJohnWileyandSons.The presentext is amodifiedersionofmy "Re-searchNote,"NC-87,issuedonMarch26,1962bytheResearchCenter ofthe InternationalBusinessMachinesCorporation.havebeen careful o avoidanychangeinsubstance,butcertainpartsof thatexpositionhavebeen clarified,and Ihaveomittedsome lessessentialsections, paragraphs,orsen-tences.SectionsI andIIcorrespondroughlytochaps.iand ii of theoriginal,SectionsIII and IVcorrespondochaps.vandv,SectionsVandVI,tochap.vi,and SectionVII,tochap.vii.
2
The simple Bacheliermodel implicitlyassumesthat thevarianceofthedifferences (t + T)
-
Z(t)is independent f the level of Z(t). There s reasonoexpect,however, that the standard deviationofAZ(t)will beproportionalotheprice evel,andforthis reason manymodernauthors have suggestedthattheoriginalassumptionofindependentncre-ments of Z(t) be replacedby the assumption f inde-pendentandGaussian ncrementsof
log.Z(t).
Since Bachelier'soriginalwork is fairly inacces-sible, it is good to mentionmorethan one reference:"Theoriedelaspeculation" Paris DoctoralDisser-tationinMathematics,March29, 1900) Annales de
l'EcoleNormaleSuperieure,ser.3,XVII(1900),21-
86;"Theoriemathematiquedujeu,"Annalesde
l'Ecole NormaleSuperieure,ser.3,XVIII(1901),143-210; Calcul des probabilites (Paris: Gauthier-Villars, 1912);Lejeu, la chanceetle hasard (Paris,
1914[reprintedpto 1929 atleast]).
3
To the best of my knowledge, he first to notethisfactwasWesleyC.Mitchell,"TheMakingandUsingof IndexNumbers,"Introductionto Index
NumbersandWholesale PricesintheUnited Statesand Foreign Countries (publishedin1915 asBulletin
No.173of theU.S.Bureauof Labor Statistics,re-printedn 1921asBulletinNo. 284).Butunques- tionableproofwasonly given byMauriceOliviern"Les Nombresindices de lavariation des prix"(Parisdoctoraldissertation, 926),andFrederickC.
MillsinThe Behavior of Prices (New York: National
BureauofEconomicResearch, 1927). Other evi-
394
 
VARIATIONOF CERTAIN SPECULATIVEPRICES 395
is, the histogramsof price changesarein-deed unimodal andtheircentral"bells"remindoneofthe "Gaussianogive." But there are typically so many "outliers"that ogivesfitted to the meansquare ofprice changes are much lower and flatterthan the distribution of the datathem-selves (see, e.g., Fig. 1). The tailsofthedistributionsofprice changes areinfactsoextraordinarily ong thatthesamplesecond moments typically varyinanerratic fashion.Forexample, thesecondmoment reproduced n Figure 2 does notseem totendtoanylimiteven thoughthe samplesizeisenormousby economicstandards,andeven thoughthe series towhich itappliesispresumablystation-ary.It ismy opinionthat these factswar-rant a radicallynewapproachtotheproblemof price variation.4Thepurposeof thispaperwillbe topresentandtestsuchanew model ofprice behaviorinspeculativemarkets.Theprincipalfea-tureofthismodel is thatstartingfromthe Bachelierprocessasappliedtolog,Z(t) insteadofZ(t),I shallreplace theGaussiandistributionsthroughout byanotherfamilyofprobability aws,to bereferredto as"stableParetian," whichwerefirstdescribednPaulLevy'sclassicCalculdesprobabilites 1925).Ina some-what complex way, the Gaussian is alimitingcaseofthisnew family, so thenew model is actually a generalizationofthat of Bachelier.Sincethe stableParetian probabilitylaws are relatively unknown, I shall be-gin with a discussionof some of the moreimportantmathematicalproperties oftheselaws. Following this,theresultsofempirical testsof the stable Paretianmodel willbe examined.The remainingsectionsof the paperwill thenbedevotedto a discussionof some of the moresophisticatedmathematical anddescrip-tive propertiesof thestable Paretianmodel. Ishall,inparticular,examineitsbearingonthevery possibilityofimple-mentingthestop-loss rulesofspeculation(Section VI).
FIG.
1.-Two
histograms llustratingdeparturefrom normalityof the fifth andtenth difference fmonthly wool prices,1890-1937.In eachcase,thecontinuousbell-shapedcurve representshe Gaus-sian "interpolate"aseduponthe samplevariance.Source:GerhardTintner,The Variate-DifferenceMethodBloomington,nd.,1940).ence,referringeither to Z(t) or tolog,Z(t)andplottedon variouskindsof coordinates, an be found in ArnoldLarson,"Measurement faRandomProc-ess in FuturePrices,"FoodResearchnstituteStudies,I (1960),313-24;M. F.M.Osborne, "BrownianMotion in the Stock Market,"Operations esearch,VII(1959), 145-73, 807-11; S.S.Alexander,"PriceMovementsnSpeculativeMarkets:Trendsof RandomWalks?"ndustrialManagementeviewof M.I.T.,II, pt.2(1961),7-26.
4Such
anapproachasalso beennecessary-andsuccessful-inothercontexts;orbackgroundnfor-mationandmany additionalexplanations ee my"NewMethodsnStatisticalEconomics,"ournalofPoliticalEconomy,Vol. LXXI (October,1963). Ibelieve,however,hateach oftheapplicationsshouldstand on their own feetandhave minimizedthenumberofcrossreferences.

You're Reading a Free Preview

Download
scribd
/*********** DO NOT ALTER ANYTHING BELOW THIS LINE ! ************/ var s_code=s.t();if(s_code)document.write(s_code)//-->