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WHAT ECONOMISTS SHOULD LEARN FROM ECONOPHYSICS

  • JOSEPH L. MCCAULEY
  • GEMUNU H. GUNARATNE
  • KEVIN E. BASSLER
Part of the NATO Science Series II book series (NAII, volume 232)

Abstract

We state the usual postulatory approach used by economists and then contrast it with our empirically based discovery of the dynamics of financial markets, where all predictions are calculated from ‘the market Green function’. In particular, we predict option prices in agreement with traders’ valuations, but without using any nonempirically determined parameters. Both global and local volatility are defined via the noise traders’ diffusion coefficient, and a new dynamic definition of ‘value’ is given. Self-fulfilling prophecies are discussed in the context of complexity.

Keywords

Financial Market Real Market Noise Trader Local Volatility Liquidity Bath 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

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Copyright information

© Springer 2006

Authors and Affiliations

  • JOSEPH L. MCCAULEY
    • 1
  • GEMUNU H. GUNARATNE
    • 1
  • KEVIN E. BASSLER
    • 1
  1. 1.Physics DeptartmentUniversity of HoustonHoustonUSA

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