Physics (Internal)

SCALING APPROACH TO ECONOMICS & FINANCE

This event is part of the Biophysics/Condensed Matter Seminar Series.

Anomalous scaling is a well established stylized fact in finance. However, its validity for sampled densities of aggregated asset returns over time intervals of various durations has limited forecasting power. It only provides a precise link between unconditioned densities at any two different durations. In this talk I will show that one can use scaling for conditioned forecasting of volatility: ideas inspired by the renormalization group allow to infer from the scaling properties of the aggregated return the joint probability density of its elementary components. This construction is at the basis of a novel modeling of asset dynamics. After reviewing the main ideas at the basis of the method, I will discuss some specific applications, dealing with both high- and low-frequency data.