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Common Underlying Dynamics in an Emerging Market: From Minutes to Months

By Renato Vicente, Charles M. de Toledo, Vitor B. P. Leite and Nestor Caticha

Abstract

We analyse a period spanning 35 years of activity in the Sao Paulo Stock Exchange Index (IBOVESPA) and show that the Heston model with stochastic volatility is capable of explaining price fluctuations for time scales ranging from 5 minutes to 100 days with a single set of parameters. We also show that the Heston model is inconsistent with the observed behavior of the volatility autocorrelation function. We deal with the latter inconsistency by introducing a slow time scale to the model. The fact that the price dynamics in a period of 35 years of macroeconomical unrest may be modeled by the same stochastic process is evidence for a general underlying microscopic market dynamics.Comment: 11 pages, 8 figures, subimitte

Topics: Condensed Matter - Statistical Mechanics, Quantitative Finance - Statistical Finance
Year: 2004
OAI identifier: oai:arXiv.org:cond-mat/0402185

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