Universal Laws and Economic Phenomena

This is a short commentary piece that discusses how the methods used in the natural sciences can apply to economics in general and financial markets specifically.Comment: 3 pages, 1 figur

The Doomsday Argument in Many Worlds

You and I are highly unlikely to exist in a civilization that has produced only 70 billion people, yet we find ourselves in just such a civilization. Our circumstance, which seems difficult to explain, is easily accounted for if (1) many other civilizations exist and if (2) nearly all of these civilizations (including our own) die out sooner than usually thought, i.e., before trillions of people are produced. Because the combination of (1) and (2) make our situation likely and alternatives do not, we should drastically increase our belief that (1) and (2) are true. These results follow immediately when considering a many worlds version of the "Doomsday Argument" and are immune to the main criticism of the original Doomsday Argument.Comment: 18 page

Simulating the Synchronizing Behavior of High-Frequency Trading in Multiple Markets

Nearly one-half of all trades in financial markets are executed by high-speed, autonomous computer programs -- a type of trading often called high-frequency trading (HFT). Although evidence suggests that HFT increases the efficiency of markets, it is unclear how or why it produces this outcome. Here we create a simple model to study the impact of HFT on investors who trade similar securities in different markets. We show that HFT can improve liquidity by allowing more transactions to take place without adversely affecting pricing or volatility. In the model, HFT synchronizes the prices of the securities, which allows buyers and sellers to find one another across markets and increases the likelihood of competitive orders being filled.Comment: 7 pages, 4 figures, 1 tabl

Are There Many Worlds?

It is often thought that the existence of other worlds cannot be scientifically verified and therefore should be treated as philosophical speculation. In this article, I describe several methods for determining if other worlds exist, even without interacting with them. These methods are based on the following premise: if there are many worlds, then the statistical properties of a natural process are biased when measured by an observer whose existence was influenced by the process. The bias is always in the same direction, making the process appear more beneficial for the existence of the observer than it actually is. I suggest several potential ways of measuring the bias, show through a simple model of population dynamics how the bias is generated, and briefly consider whether our current drop in population growth is evidence of many worlds

A Theory for Market Impact: How Order Flow Affects Stock Price

It is known that the impact of transactions on stock price (market impact) is a concave function of the size of the order, but there exists little quantitative theory that suggests why this is so. I develop a quantitative theory for the market impact of hidden orders (orders that reflect the true intention of buying and selling) that matches the empirically measured result and that reproduces some of the non-trivial and universal properties of stock returns (returns are percent changes in stock price). The theory is based on a simple premise, that the stock market can be modeled in a mechanical way - as a device that translates order flow into an uncorrelated price stream. Given that order flow is highly autocorrelated, this premise requires that market impact (1) depends on past order flow and (2) is asymmetric for buying and selling. I derive the specific form for the dependence in (1) by assuming that current liquidity responds to information about all currently active hidden orders (liquidity is a measure of the price response to a transaction of a given size). This produces an equation that suggests market impact should scale logarithmically with total order size. Using data from the London Stock Exchange I empirically measure market impact and show that the result matches the theory. Also using empirical data, I qualitatively specify the asymmetry of (2). Putting all results together, I form a model for market impact that reproduces three universal properties of stock returns - that returns are uncorrelated, that returns are distributed with a power law tail, and that the magnitude of returns is highly autocorrelated (also known as clustered volatility).Comment: PhD Thesis, University of Illinois at Urbana-Champaign (2007), 124 page

Are There Many Worlds?

It is often thought that the existence of other worlds cannot be scientifically verified and therefore should be treated as philosophical speculation. In this article, I describe several methods for determining if other worlds exist, even without interacting with them. These methods are based on the following premise: if there are many worlds, then the statistical properties of a natural process are biased when measured by an observer whose existence was influenced by the process. The bias is always in the same direction, making the process appear more beneficial for the existence of the observer than it actually is. I suggest several potential ways of measuring the bias, show through a simple model of population dynamics how the bias is generated, and briefly consider whether our current drop in population growth is evidence of many worlds