A thermodynamical view on asset pricing

Gündüz, Güngör
Gunduz, Yalin
The dynamics of stock market systems was analyzed from the stand point of viscoelasticity, i.e. conservative and nonconservative (or elastic and viscous) forces. Asset values were modeled as a geometric Brownian motion by generating random Wiener processes at different volatilities and drift conditions. Specifically, the relation between the return value and the Wiener noise was investigated. Using a scattering diagram, the asset values were placed into a 'potentiality-actuality' framework, and using Euclidean distance, the market values were transformed into vectorial forms. Depending on whether the forthcoming vector is aligned or deviated from the direction of advancement of the former vector, it is possible to split the forthcoming vector into its conservative and nonconservative components. The conservative (or in-phase, or parallel) component represents the work-like term whereas the nonconservative (or out-of-phase, or vertical) component represents heat-like term providing a treatment of asset prices in thermodynamical terms. The resistances exhibited against these components, so-called the modulus, were determined in either case. It was observed that branching occurred in the values of modulus especially in the modulus of the conservative component when it was plotted with respect to the Euclidean distance of Wiener noise, i.e. Wiener length. It was also observed that interesting patterns formed when the change of modulus was plotted with respect to the value ofWiener noise. The magnitudes of work-like and heat-like terms were calculated using the mathematical expressions. The peaks of both heat-like and work-like terms reveal around the zero value of Wiener noise and at very low magnitudes of either term. The increase of both the volatility and the drift acts in the same way, and they decrease the number of low heat-like and work-like terms and increase the number of the ones with larger magnitudes. Most interestingly, the increase either in volatility or in drift decreases the heat-like term but increases the work-like term in the overall. Finally, the observation of the golden ratio in various patterns was interpreted in terms of physical resistance to flow.


A quantitative analysis of cost-push shocks and optimal inflation volatility
Senay, Ozge; Sutherland, Alan (Informa UK Limited, 2008-01-01)
This article presents a quantitative analysis of optimal inflation volatility in a simple sticky-price general equilibrium model subject to both supply and cost-push shocks. It is found that optimal policy implies a relatively small degree of inflation volatility even when cost-push shocks are the dominant source of economic disturbance. In addition, it is found that optimal policy generates only a very small welfare gain when compared to strict inflation targeting.
Exploring House Price Dynamics: An Agent-Based Simulation with Behavioral Heterogeneity
Ozbakan, Tolga A.; Kale, Serdar; Dikmen Toker, İrem (Springer Science and Business Media LLC, 2019-08-01)
The objective of this study is to contribute to the understanding of price formations in housing markets through an agent-based simulation that conceptualizes insights from behavioral economics. For this purpose, the study uses a prominent real estate market model as a benchmark and extends it to account for (1) behavioral heterogeneity and (2) dynamic agent interaction. The validation of the model is carried out by using real data from the Turkish housing market. The results show that the introduction of a...
On forward interest rate models : via random fields and Markov jump processes
Altay, Sühan; Körezlioğlu, Hayri; Department of Financial Mathematics (2007)
The essence of the interest rate modeling by using Heath-Jarrow-Morton framework is to find the drift condition of the instantaneous forward rate dynamics so that the entire term structure is arbitrage free. In this study, instantaneous forward interest rates are modeled using random fields and Markov Jump processes and the drift conditions of the forward rate dynamics are given. Moreover, the methodology presented in this study is extended to certain financial settings and instruments such as multi-country...
A market model for pricing inflation indexed bonds with jumps incorporation
Güney, İbrahim Ethem; Hayfavi, Azize; Department of Financial Mathematics (2008)
Protection against inflation is an essential part of the today's financial markets, particularly in high-inflation economies. Hence, nowadays inflation indexed instruments are being increasingly popular in the world financial markets. In this thesis, we focus on pricing of the inflation-indexed bonds which are the unique inflation-indexed instruments traded in the Turkish bond market. Firstly, we review the Jarrow-Yildirim model which deals with pricing of the inflation-indexed instruments within the HJM fr...
Dynamics of sticky information and sticky price models in a New Keynesian DSGE framework
Arslan, M. Murat (Elsevier BV, 2008-11-01)
Recent literature on monetary policy analysis extensively uses the sticky price model of price adjustment in a New Keynesian Macroeconomic framework. This price setting model, however. has been criticized for producing implausible results regarding inflation and output dynamics. This paper examines and compares dynamic responses of the sticky price and sticky information models to a cost-push shock in a New Keynesian DSGE framework. It finds that the sticky information model produces more reasonable dynamic...
Citation Formats
G. Gündüz and Y. Gunduz, “A thermodynamical view on asset pricing,” INTERNATIONAL REVIEW OF FINANCIAL ANALYSIS, pp. 310–327, 2016, Accessed: 00, 2020. [Online]. Available: https://hdl.handle.net/11511/51902.