We present a theory of excess stock market volatility, in which market movements are due to trades by very large institutional investors in relatively illiquid markets. Such trades generate significant spikes in returns and volume, even in the absence of important news about fundamentals. We...

This methodological paper presents a class of stochastic processes with appealing properties for theoretical or empirical work in finance and macroeconomics, the "linearity-generating" class. Its key property is that it yields simple exact closed-form expressions for stocks and bonds, with an...

Understanding correlations in complex systems is crucial in the face of turbulence, such as the ongoing financial crisis. However, in complex systems, such as financial systems, correlations are not constant but instead vary in time. Here we address the question of quantifying state-dependent...

Properly estimating correlations and understanding how they change under different economic conditions plays a key role in asset pricing models, risk management, and many econometric models. In this paper we introduce a robust framework to identify a meaningful correlation relationship, address...

Classic studies of the probability density of price fluctuations g for stocks and foreign exchanges of several highly developed economies have been interpreted using a power-law probability density function P(g) ∼ g−( 1) with exponent values 2, which are outside the L´evy-stable regime 0 ...

According to the leading models in modern finance, the presence of intraday lead-lag relationships between financial assets is negligible in efficient markets. With the advance of technology, however, markets have become more sophisticated. To determine whether this has resulted in an improved...