In financial markets an excess of buying tends to drive prices up, and an excess of selling tends to drive them down. This is called market impact. Based on a simplified model for market making, it is possible to derive a unique functional form for market impact. This can be used to formulate a...

Highly optimized tolerance is a model of optimization in engineered systems, which gives rise to power-law distributions of failure events in such systems. The archetypal example is the highly optimized forest fire model. Here we give an analytic solution for this model which explains the origin...

A deterministic trading strategy can be regarded as a signal processing element that uses external information and past prices as inputs and incorporates them into future prices. This paper uses a market maker based method of price formation to study the price dynamics induced by several...

We investigate the problem of learning to play a generalized rock-paper-scissors game. Each player attempts to improve her average score by adjusting the frequency of the three possible responses. For the zero-sum case the learning process displays Hamiltonian chaos. The learning trajectory can...

Physicists have recently begun doing research in finance, and even though this movement is less than five years old, interesting and useful contributions have already emerged. This article reviews these developments in four areas, including empirical statistical properties of prices,...

Systemic risk must include the housing market, though economists have not generally focused on it. We begin construction of an agent-based model of the housing market with individual data from Washington, DC. Twenty years of success with agent-based models of mortgage prepayments give us hope...

The mutual fund industry manages about a quarter of the assets in the U.S. stock market and thus plays an important role in the U.S. economy. The question of how much control is concentrated in the hands of the largest players is best quantitatively discussed in terms of the tail behavior of the...

We introduce an algorithm for the segmentation of a class of regime switching processes. The segmentation algorithm is a non parametric statistical method able to identify the regimes (patches) of the time series. The process is composed of consecutive patches of variable length, each patch...

We build a simple model of leveraged asset purchases with margin calls. Investment funds use what is perhaps the most basic financial strategy, called "value investing," i.e. systematically attempting to buy underpriced assets. When funds do not borrow, the price fluctuations of the asset are...