AN INTRODUCTION TO ECONOPHYSICS Correlations and Complexity in Finance

This book concerns the use of concepts from statistical physics in the description of financial systems. Specifically, the authors illustrate the scaling concepts used in probability theory, in critical phenomena, and in fully developed turbulent fluids. These concepts are then applied to financial time series to gain new insights into the behavior of financial markets. The authors also present a new stochastic model that displays several of the statistical properties observed in empirical data. Usually in the study of economic systems it is possible to investigate the system at different scales. But it is often impossible to write down the ‘microscopic’ equation for all the economic entities interacting within a given system. Statistical physics concepts such as stochastic dynamics, shortand long-range correlations, self-similarity and scaling permit an understanding of the global behavior of economic systems without first having to work out a detailed microscopic description of the same system. This book will be of interest both to physicists and to economists. Physicists will find the application of statistical physics concepts to economic systems interesting and challenging, as economic systems are among the most intriguing and fascinating complex systems that might be investigated. Economists and workers in the financial world will find useful the presentation of empirical analysis methods and wellformulated theoretical tools that might help describe systems composed of a huge number of interacting subsystems. This book is intended for students and researchers studying economics or physics at a graduate level and for professionals in the field of finance. Undergraduate students possessing some familarity with probability theory or statistical physics should also be able to learn from the book.