.

ECONOPHYS-KOLKATA II
International Workshop on

E onophysi s of Sto k Markets and Minority Games

14-17 February 2006

Organizer
Centre for Applied Mathemati s and Computational S ien e (CAMCS),
Saha Institute of Nu lear Physi s

Convener
Bikas K Chakrabarti

Se retary
Arnab Chatterjee

Venue
Main Auditorium
Saha Institute of Nu lear Physi s
1/AF Bidhannagar, Kolkata 700 064, India
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Abstra ts
Invited Talks

Triangular arbitrage in the foreign ex hange market

Yukihiro Aiba
Dept. of Physi s, and Institute of Industrial S ien e,
University of Tokyo Bw801, Komaba 4-6-1, Meguro, Tokyo 153-8505, JAPAN
Analyzing orrelation in nan ial time series is a topi of onsiderable interest. In the foreign ex hange market,
a orrelation among the ex hange rates is made by a triangular arbitrage transa tion. The triangular arbitrage
transa tion is a nan ial a tivity that takes advantage of the three foreign ex hange rates among three urren ies.
It makes the produ t of the three foreign ex hange rates onverge to its average, thereby generating an intera tion
among the rates. In order to study ee ts of the triangular arbitrage on the u tuations of the ex hange rates, we
introdu ed a sto hasti model des ribing the time evolution of the ex hange rates with an intera tion. The model
su essfully des ribed the u tuation of the data of the real market. Be ause the model is phenomenologi al, we
refer this model as the ma ros opi model. The purpose of this talk is to understand mi ros opi ally ee ts of the
triangular arbitrage on the foreign ex hange market. For the purpose, we introdu e a new model whi h fo uses on
ea h dealer in the markets; the 'mi ros opi model.' We dis uss the relation between the ma ros opi model and the
mi ros opi model through an intera tion strength whi h is regarded as a spring onstant.

EÆ ient Market Hypothesis and Noise Trading in Indian Capital Market

Debasis Bag hi
Institute of Cost and Works A ountants of India, Kolkata.
The EÆ ient Market Hypothesis underlies that the sto k pri es at any instant re e t all the available information,
even private information. We examine whether there are other fa tors that are mistaken as information by the
investors, whi h in uen e sto k pri e movement. We investigate what indi ators are sele ted by the investors to
predi t the future pri es on a short term basis. For the purpose, behaviour of three indi ators is examined. First, we
hypothesize that for short term gain the investors will form their investment de isions on very nas ent information,
whi h is not related to the fundamental performan e of the sto k and therefore these may be termed as noise. We
sele t three su h indi ators. The log of the spread between high and low quotes of the sto k during the previous day,
the spread between opening and previous losing pri e of the sto k during the previous day and the log of turnover of
the sto k in monetary units during the previous day. Se ond, we also investigate whether the investors take dierent
de isions or hoose dierent indi ators during distressed and ourishing periods of the sto k market. It is expe ted
that the investors will be more dependant on fundamental news during distressed market ondition and lesser on
noises. For the purpose we sele t two distin t periods for our study, i.e., from November 1, 1999 to O tober 31, 2000
and from November 1, 2004 to O tober 31, 2005. During 1999-2000, the Indian sto k market entered into distressed
ondition due to rash of sto k pri es of the InfoTe h ompanies and during 2004-2005 the Indian sto k market saw an
enormous surge of the sto k pri es leading to phenomenal rise of sto k index by more than fty per ent. The data are
olle ted and examined on daily basis. An investigation of the investors behaviour during both the periods is likely to
bring out how they use noise for sto k investment de isions. We assume that the above variables are linearly related to
the sto k pri e movement and we use multiple regression model to test our hypothesis where the dependant variable
is the log of the sto k pri e and the independent variables are the above three variables. The results show that all the
independent variables are statisti ally signi ant in varying degree. The rst one is found to be signi ant in most of
the ases while the se ond is found to be signi ant in least number of ases. Sin e the oeÆ ient of determination
is low in several ases, it is in the limited sense that the variables are signi ant. Interestingly, the variables show
nearly identi al behaviour during the two time periods thereby reje ting our hypothesis that the investors are likely
to take dierent de isions during the period of risis as opposite to during the boom period. The results therefore
establish in limited sense that the noise traders are likely to use noises in the same manner in whatever ondition the
sto k market is in and that previous days volatility as indi ated by the high and low quotes as well as turnover is
relied upon for sto k investment de isions. These ndings are ontrary to what have been laid down by the EÆ ient
Market Hypothesis, sin e as per the hypothesis the fundamental information would move the sto k pri es. The study
suggests that dire tion of the resear h should be on the human behaviour model to explain the investors hoi e under
su h situation.
 3

Flu tuation dynami s of ex hange rates on Indian nan ial market

P. Barat and A. Sarkar
Variable Energy Cy lotron Centre, 1/AF Bidhan Nagar, Kolkata 700064, India
Finan ial market is an example of a strongly u tuating omplex system with large number of intera ting elements.
Physi ists always nd interest in the study of the dynami s of omplex systems. For this reason they got attra ted to
the eld of e onomi s and a new subje t ?E onophysi s? emerged. The omplexity of its internal elements, external
fa tors a ting on it and the unknown nature of the intera tions between the dierent omprising elements make the
study of a nan ial market the most ompli ated and hallenging one. In the re ent years, new and sophisti ated
methods have been invented and developed in statisti al and nonlinear physi s to study the dynami al and stru tural
properties of various omplex systems. These methods have been su essfully applied in the eld of quantitative
e onomy, whi h gave a han e to look at the e onomi al and nan ial data from a new perspe tive. The ex hange
rates between urren ies are parti ularly interesting ategory of e onomi data to study as they di tate the e onomy
of most ountries. The time dependen e of the ex hange rates is usually omplex in nature and hen e, it is interesting
to analyze using the newly developed statisti al methods. In this paper we report the study of detailed s aling
behavior of the average daily ex hange rate returns of Indian Rupee (INR) versus four important foreign urren ies
in Indian e onomy, namely the US Dollar (USD), the EURO, the Great Britain Pound (GBP) and the Japanese
YEN for the past few years. Average daily ex hange rate return of the Indian Rupee against US Dollar is found to
exhibit a persistent s aling behavior and follow Levy stable distribution. On the ontrary the average daily ex hange
rate returns of the other three foreign urren ies do not show persisten y or antipersisten y and follow Gaussian
distribution. Moreover, the omplexity measurement of the ex hange rate data revealed that the INR-USD ex hange
rate is more omplex ompared to the other ex hange rates.

EÆ ien y of Indian sto k and futures markets

Udayan Kumar Basu
Future Business S hool, Kolkata.
ukbasuvsnl.net
EÆ ien y of nan ial markets has been engaging the attention of e onophysi ists for quite some time. Apart from
theoreti al impli ations, it also has immense pra ti al importan e for investors. Some idea of the possible dire tion of
future movements of share pri es would bring substantial gains. But, market eÆ ien y would ensure qui k per olation
of information a ross all ategories of investors, and smother all serial orrelations among su essive movements of
share pri es. For estimating the eÆ ien y of nan ial markets, an examination of su h serial orrelations among
the pri es or rates of return prevailing in the market is useful. Besides, su h auto orrelations an also throw some
light on how liquid the market is or how smooth the market operations are, be ause a perfe t liquid market does not
permit su h orrelations to persist. The liquidity and eÆ ien y of markets ontrol the degree of orrelations that is
ompatible with a near absen e of arbitrage opportunity.
This arti le estimates the extent of daily orrelations between su essive movements of pri e and rate of return of
a major Indian sto k index viz. Nifty and the orresponding index futures viz. Nifty Futures. Su h orrelations are
found to be insigni ant and this indi ates that, at least in the short term, the markets are eÆ ient. The market
o-varian es or betas of the sto k index futures turn out to be lose to unity, suggesting that they more or less mirror
the movements of the sto k index, and an be ee tive in hedging apital market risks. However, the daily orrelation
among the movements of the basis appears to have a non-negligible value. The onsequential opportunity for arbitrage
between the ash market and the futures market is apparently not exploited to bring ba k inter market orrelations to
insigni ant levels. This nding suggests la k of adequate market liquidity and eÆ ien y impeding su h inter-market
transa tions.

Studies on orrelations in sto k pri es and adaptive minority games

Anirban Chakraborti
Department of Physi s, Banaras Hindu University, Varanasi 221005, India
First, we review some of the studies on orrelations in the pri e time-series of sto ks, dis ussing the onstru tion
and appli ations of "asset tree". Se ond, we review studies on "adaptive minority games", dis ussing the improvement
of performan es of the individual players and the system as a whole, using geneti rossover me hanisms.
 4

A random matrix approa h to the study of an Indian Sto k Market

Nivedita Deo
Department of Physi s and Astrophysi s, University of Delhi, Delhi - 110007.
A random Matrix approa h is used to examine the volatility of an Indian sto k market in terms of aspe ts like
parti ipation, syn hronization of sto ks and quanti ation of volatility. Volatility pattern of the market is found using
the BSE index for the three-year period 2000-2002. Random matrix analysis is arried out using daily returns of 70
sto ks for several time windows of 85 days in 2001 to (i) do a brief omparative analysis with statisti s of eigenvalues
and eigenve tors of the matrix C of orrelations between pri e u tuations, in time regimes of dierent volatilities.
While a bulk of eigenvalues falls within RMT bounds in all the time periods, we see that the largest (deviating)
eigenvalue orrelates well with the volatility of the index, the orresponding eigenve tor learly shows a shift in the
distribution of its omponents from volatile to less volatile periods and veries the qualitative asso iation between
parti ipation and volatility (ii) observe that the Inverse parti ipation ratio for t he 'last' eigenve tor is sensitive to
market u tuations (the two quantities are observed to anti orrelate signi antly) (iii) set up a variability index, V
whose temporal evolution is found to be signi antly orrelated with the volatility of the overall market index.

S aling theory and size-dependent u tuations in sto k market data

Zoltan Eisler
Budapest University of Te hnology and E onomi s
Institute of Physi s, Department of Theoreti al Physi s
Budafoki str. 8, H-1111, Budapest, Hungary
A areful analysis of the high resolution data of New York Sto k Ex hange and NASDAQ reveals that many
hara teristi s of a sto k's trading a tivity depend monotonously on the apitalization of the underlying ompany.
This applies to the means of traded value per minute and trading frequen y. Moreover, the degree of persisten e in
these quantities is not universal among sto ks: their Hurst exponent in reases logarithmi ally with ompany size. A
similar tenden y is present in intertrade times. Su h ndings an be well hara terized within a general (multi)s aling
framework of omplex systems.

Agents Play Mix-game

Chengling Gou
Physi s Department, Beijing University of Aeronauti s and Astronauti s
37 Xueyuan Road, Heidian Distri t, Beijing, 100083, China
gou henglingbuaa.edu. n, gou henglinghotmail. om
This paper proposes a modi ation to Minority Game (MG) by adding some agents who play majority game into
MG. So it is referred to as mix-game. The highlight of this model is that the two groups of agents in mix-game have
dierent bounded abilities to deal with history information and to ount their own performan e. Through simulations,
this paper nds out that the lo al volatilities, the average winnings of agents and the orrelations between the average
winnings of agents and the means of lo al volatilities depend on the ongurations of history memories of agents and
the fra tion of agents in group 1. Furthermore this paper analyses the underlying me hanisms for these ndings. These
results suggest that history memoryies of agents in group 1 be smaller than that of agents in group 2 when mix-game
model is used to simulate the nan ial markets. An example is given to illustrate the appli ation of mix-game for
simulation of nan ial markets.

Agent-Based Modelling with Wavelets De omposition and an Evolutionary Arti ial Neural Network: Appli ations
to CAC 40 Fore asting
Serge Hayward
Department of Finan e, E ole Superieure de Commer e de Dijon
Burgundy S hool of Business, 29 rue Sambin 21000 Dijon, Fran e
Unlike fully revealing equilibrium of homogeneous beliefs, in the environment with heterogeneous beliefs pri es are
driven by prevailing expe tations of market parti ipants. Thus, fore asting future pri es, one must form expe tations
of others fore asts. Evolution of agents' expe tations largely governs the adaptive nature of market pri es. Overlapping
beliefs of heterogeneous agents prevent the ee tive examination of expe tation formation and pri e fore asting by
 5

traditional methods. In the approa h proposed in this paper, a time series is de omposed into a ombination of
underlying series, representing beliefs of major lusters of agents. The analysis of individual parts improves statisti al
inferen e, isolating ee tively nonstationary and nonlinearly features. Emergent lo al behaviour is also more re eptive
to predi tion. The overall fore ast (weighted ombination of individual fore asts) is found to be determined and evolved
depending on spe i market onditions. On the statisti al level, the data generating me hanism is onsidered as
omplex multi-stru tured system, with individual layers orresponding to parti ular frequen ies. Re e ting the time
preferen es of agents, trading strategies being homogeneous intra-type are heterogeneous inter-type for agents with
distin t time preferen es. Overall market a tivity at ea h moment, providing the dynami feedba k a ross agents'
types, generates market pri es. The frequen y de omposition of a time series identies the lo al and global stru tures
and separates short and long time dynami s. Wavelet transforms are used for adaptive analysis of lo al behaviour of
heterogeneous agents. The Geneti Algorithm is applied to determine the optimal de omposition of the signal and
representation of heterogeneous traders. The Arti ial Neural Network is trained to learn information at the s ale
level that is hidden in the aggregate. The resulting models seek to enhan e the understanding of the underlying data
generating me hanisms of nan ial time series and to develop new approa hes for nan ial fore asting.

A Pre ursor of Market Crashes

Taisei Kaizoji
Division of So ial S ien es, International Christian University,
3-10-2 Osawa, Mitaka, Tokyo 181-8585, Japan.
In this paper, we quantitatively investigate the properties of a statisti al ensemble of sto k pri es. We fo us
attention on the relative pri e dened as X(t) = S(t)/S(0), where S(0) is the initial pri e. We sele ted approximately
3200 sto ks traded on the Japanese Sto k Ex hange and formed a statisti al ensemble of daily relative pri es for ea h
trading day in the 3-year period from January 4, 1999 to De ember 28, 2001, orresponding to the period in whi h
the internet Bubble formed and rashes in the Japanese sto k market.
We found that the upper tail of the omplementary umulative distribution fun tion of the ensemble of the relative
pri es in the high value of the pri e is well des ribed by a power-law distribution with an exponent that moves over
time. Furthermore, we found that as the power-law exponents approa hed two, the bubble burst. It is reasonable to
assume that when the power-law exponents approa hed two, it indi ates the bubble is about to burst.

Statisti al Distribution of the Length and Magnitude of Sto k Returns Runs

Honggang Li
Department of Systems S ien e, S hool of Management,
Beijing Normal University, Beijing 100875, China
hlibnu.edu. n
Runs is sequen e of onse utive positive or negative sto k returns, and parti ularly we note the positive return
sequen e as positive runs and the negative return sequen e as negative runs. Naturally, runs has dierent length
and the frequen y of dierent length may exhibit ertain statisti al features. We analyze return data of Dow Jones
Industrial Average (DJIA) from O t.1 1928 to De .30 2005 (19397 transa tion dates in luded) and measure the
frequen y of dierent length runs. We argue that the relationship between the frequen y of runs and the length of
runs follows an exponential law and the positive runs and negative runs shows signi ant asymmetries in frequen y
distribution. Furthermore, we ompute the a umulative return of every runs and on lude that the frequen y of the
a umulative return (referred as magnitude of runs) is also nearly onsistent with an exponential law.

E ology of trading rms in a nan ial market

Fabrizio Lillo
1 , Esteban Moro2 and Rosario N. Mantegna1
1 Dipartimento di Fisi a e Te nologie Relative, Universit
a di Palermo, Viale delle S ienze, I-90128 Palermo, Italy
2 Universitad Carlos III, Madrid, Spain

The understanding of omplex so ial or e onomi systems is an important hallenge of modern so ieties. Despite
many agent based models have been investigated, in few ases an agent based empiri al investigation is possible due to
the la k of data. Here we present a omprehensive study of the Madrid Sto k Ex hange showing that nan ial rms
are self-organized as an e ology of rms with various degree of spe ialization. Few large rms push the pri e in a given
dire tion demanding liquidity to the market on a long time s ale, whereas many heterogeneous rms provide liquidity
on a short time s ale by reverting the dire tion of pri e. Our analysis allows to build one of the rst empiri ally
grounded agent based models of nan ial markets.
 6

Ex ess Volatility and Herding in an Arti ial Finan ial Market: Estimation of an Agent-Based Model
Thomas Lux
Department of E onomi s, University of Kiel, Olshausenstr. 40, 24118 Kiel, Germany
The behavioral origins of the stylized fa ts of nan ial returns have been addressed in a growing body of agent-
based models of nan ial markets. While the traditional eÆ ient market viewpoint explains all statisti al properties
of returns by similar features of the news arrival pro ess, the more re ent behavioral nan e models explain them
as imprints of universal patterns of intera tion in these markets. In this paper we ontribute to this literature by
introdu ing a very simple agent-based model in whi h the ubiquitous stylized fa ts (fat tails, volatility lustering)
are emergent properties of the intera tion among traders. The simpli ity of the model allows us to estimate the
underlying parameters, sin e it is possible to derive a losed form solution for the distribution of returns. We show
that the tail shape hara terizing the fatness of the un onditional distribution of returns an be dire tly derived from
some stru tural variables that govern the traders' intera tions, namely the herding propensity and the autonomous
swit hing tenden y.

Dynami instability in a phenomenologi al model of orrelated assets

Matteo Marsili
The Abdus Salam International Centre for Theoreti al Physi s, Strada Costiera 11, 34014 Trieste, Italy
We show that nan ial orrelations exhibit a non-trivial dynami behavior. We introdu e a simple phenomenologi al
model of a multi-asset nan ial market, whi h takes into a ount the impa t of portfolio investment on pri e dynami s.
This aptures the fa t that orrelation determine the optimal portfolio but are ae ted by investment based on it. We
show that su h a feedba k on orrelations gives rise to an instability when the volume of investment ex eeds a riti al
value. Close to the riti al point the model exhibits dynami al orrelations very similar to those observed in real
markets. Maximum likelihood estimates of the models parameter for empiri al data indeed onrms this on lusion,
thus suggesting that real markets operate lose to a dynami ally unstable point.

Information extra tion in s heduling problems with non-identi al ma hines

Manipushpak Mitra
E onomi Resear h Unit, Indian Statisti al Institute 203, B. T. Road, Kolkata 700 108, India
In this paper we look at the problem of s heduling jobs on a nite set of ma hines where the pro essing speed of
the ma hines may be dierent. We assume that the waiting osts of the jobs are private information and that all jobs
takes identi al pro essing time in any given ma hine. By allowing for monetary transfer a ross jobs, we identify the
omplete lass of information revelation me hanisms that leads to (a) minimization of aggregate ost and (b) ostless
information extra tion.

Hierar hi ally nested time series models from dendrograms

Rosario N. Mantegna , Mi hele Tumminello and Fabrizio Lillo
Dipartimento di Fisi a e Te nologie Relative,
Universita di Palermo, Viale delle S ienze, I-90128 Palermo, Italy
We analiti ally show that spe tral methods, su h as prin ipal omponent analysis, are unable to reveal the hier-
ar hi al stru ture of a set of mutivariate data. We introdu e a method for asso iating a hierar hi ally nested fa tor
model to a set of data by making use of lustering algorithms. We also provide a methodology to sele t the fa tors
of the model that are robust against statisti al un ertainty of real data. We provide an example of the method
appli ation based on nan ial time series of equity returns traded at New York Sto k Ex hange.
 7

Modelling nan ial time series

P. Manimaran1 , P. K. Panigrahi2, J. C. Parikh2 , S. Basu3 , and M. B. Pore ha2
1 S hool of Physi s, University of Hyderabad, Hyderabad, 500 046, India
2 Physi al Resear h Laboratory, Ahmedabad, 380 009, India
3 Spa e Appli ations Center, Ahmedabad, 380 015, India

Finan ial time series in general exhibit average behavior at "long" time s ales and sto hasti behavior at "short"
time s ales. As in statisti al physi s, the two have to be modelled using dierent approa hes - deterministi for trends
and probabilisti for u tuations about the trend. In this talk, we will des ribe a new wavelet based approa h to
separate the trend from the u tuations in a time series. A determin- isti (non-linear regression) model is then
onstru ted for the trend using geneti algorithm. We thereby obtain an expli it analyti model to des ribe dynami s
of the trend. Further the model is used to make predi tions of the trend. We also study statisti al and s aling
properties of the u tuations. The u tuations have non- Gaussian probability distribution fun tion and show multi
s aling behavior. Thus, our work results in a omprehensive model of trends and u tuations of a nan ial time series.

The Nature and Future of E onophysi s

J. Barkley Rosser, Jr.
Department of E onomi s, MSC 0204, James Madison University
Harrisonburg, VA 22807 USA
This paper will dis uss the origins and meanings of e onophysi s, both in its modern form and in its deeper origins
and foundations. This will involve a more extensive understanding of the intera tions between e onomi s and physi s
going ba k into the nineteenth entury. A variety of appli ations will onsidered. While urrent e onophysi s stands
in ontrast with onventional e onomi s, a future evolution in whi h e onomi s hanges as a result of this intera tion
is fore ast. Relations between it and e ono hemistry and e onobiology will also be onsidered.

Random matrix approa h to u tuations and s aling in omplex systems : Appli ations in market analysis
M. S. Santhanam
Theoreti al Physi s and Complex Systems Division
Physi al Resear h Laboratory, Navrangpura, Ahmedabad 380 009, India
Random matrix theory (RMT) had its origins in the statisti al analysis of nu lear spe tra. In re ent times, it
has emerged as an important paradigm to study and understand multivariate orrelations in empiri al settings. For
instan e, sto k-sto k orrelations in a market an be subje ted to RMT type analysis. Thus, in prin iple, any
multivariate time series data an be analysed within the RMT framework. We review some of these results. However,
many important questions about universality and s aling require only a single time series, for example, a series of sto k
market index. Can RMT be a model for su h pro esses ? We argue that we an treat the appropriately transformed
eigenvalues of a quantum system to be a time series. Then, we an use RMT to model orrelations and u tuations
arising in univariate series. We show that detrended u tuation analysis, often used to study s aling, is equivalent
to delta-3 statisti s widely used in RMT ontext. Using this onne tion we obtain theoreti al estimates for Hurst
exponents. In general, an anti-persitent time series an be modelled by the 'spe tral time series' drawn from the
standard Wigner-Dyson ensemble of RMT. We illustrate these ideas using nan ial data from the markets.

Regional Disparity, Fis al Autonomy and Cooperation

Abhirup Sarkar
E onomi Resear h Unit, Indian Statisti al Institute 203, B. T. Road, Kolkata 700 108, India
Why do ba kward regions ask for s al autonomy in a ountry onsisting of several regions with varying levels of
development? In a set up where regions an hoose between s al autonomy and s al ooperation, an we expe t
a fall in regional inequality over time? The paper tries to answer these questions by setting up a simple s al game
played between regions. It is shown that if initial inequality is high enough, ba kward regions would prefer autonomy
to ooperation and in some ases this might redu e regional inequality in the long run.
 8

The Power (Law) of Indian Markets: Analysing NSE and BSE trading statisti s
Sitabhra Sinha
Institute of Mathemati al S ien es, C.I.T. Campus, Taramani, Chennai 600 113, INDIA
We have re ently analysed both ti k-by-ti k as well as daily losing pri es for sto ks listed in the NSE, and daily
losing pri es for sto ks listed in BSE. We have found that regardless of the ex hange, and the time resolution of
the data, the return distribution shows a long tail, suggestive of a power law with exponent approximately equal to
-3. This runs ounter to some re ent studies that have laimed that the Indian market behaves loser to a random
walk than sto k markets in the developed world. We have also analysed the distribution of the number of trades and
volume, as well as the volatility behavior. Finally, we have looked at how orrelated the movement of sto ks are in
NSE, by on entrating on the NIFTY-50 sto ks.

The Apparent "Madness of Crowds": Irrational olle tive behavior as an emergent out ome of networked
intera tions among individually rational agents
Sitabhra Sinha
Institute of Mathemati al S ien es, C.I.T. Campus, Taramani, Chennai 600 113, INDIA
The o urren e of abnormal events in markets su h as "bubbles" and " rashes" have often been as ribed to irrational
behavior of traders. In normal ir umstan es, agents are thought to be rational beings whose de isions are entirely
governed by desire to maximise their gain with minimum risk. However, in ertain ir umstan es, agents seem to take
part in an extraordinary "mass delusion", where ea h individual follows the mass of traders behaving as a herd to a
ourse of a tion whi h seems irrational (su h as ex hanging a tulip for a house, during the height of the Tulipomania
buuble in 17th entury Holland). In this talk we argue that su h apparently irrational behavior is an emergent behavior
of a network of intera ting agents, where ea h agent is behaving rationally. Our argument is based on the fa t that
every agent has a pro essing ost of verifying ea h pie e of information that it re eives. To minimize this ost it has to
trust a few other agents on the basis of previous experien e. This "web of trust" reates an intera tion network among
agents, in whi h one agent an free-ride on the pro essing performed by another agent by simply opying whatever the
latter is doing. While in normal ir umstan es this will maximize the gain of an agent, its su ess depends ru ially
on the assumption that someone down the hain of trust is a tually pro essing the information to ome up with the
orre t a tion. If this assumption is violated, e.g., by the formation of a losed feedba k "loop of trust", apparently
irrational behavior su h as bubbles and rashes ensue.

Modelling limit order nan ial markets

Robin Stin h ombe
Rudolf Peierls Centre for Theoreti al Physi s,
Oxford University, 1 Keble Road, Oxdord OX1 3 NP, United Kingdom.
Finan ial markets are similar to ommon physi al systems in being many body assemblies with out-of-equilibrium
sto hasti dynami s. Perhaps the simplest of all nan ial markets is the limit order market, where a "book" re ords
pla ement and removal of orders to buy or sell, and their settlement. Regarding the orders as "parti les" depositing,
evaporating or annihilating, at pres ribed rates on a pri e axis provides both a physi al analogy and the starting point
for a lass of market models. The onstru tion and analysis of su h models and their properties and limitations will
be outlined here, starting from 2000, when detailed temporal limit order market data be ame available ele troni ally
whi h made it possible to infer the "phenomenologi al" sto hasti dynami pro esses whi h operate in the market
and how their rates are onne ted between themselves and to the market ondition. The intera tive feedba k in-
volved here is the origin of the most interesting olle tive properties of the system, and its stability and u tuating
behaviour. Analyti analysis of su h models has made some progress using te hniques whi h will be outlined. A
on luding dis ussion on erns omissions aused by the zero-intelligen e hara ter of the models: real markets are of
ourse not governed by physi al laws, but by agents with individual hoi es and strategies. Yet the zero-intelligen e
model lass works surprisingly well; ould it turn out that a des ription in orporating agents hoi e establishes the
"phenomenologi al" rate relations?
 9

On the eÆ ien y of nan ial markets

Yougui Wang
Department of Systems S ien e, S hool of Management,
Beijing Normal University, Beijing 100875, P R China
There has been vigorous debate over the question of whether or not the nan ial markets are eÆ ient. The people
who believe that it is eÆ ient argue all information is in luded in the market pri e and no one an arbitrage in the
market. Instead those who are in the opposite viewpoint provide many empiri al eviden es. So far, there is not an
expli it denition of eÆ ien y for nan ial markets, upon whi h our judgment about whether the market is eÆ ient
or not is formed.
Usually, a market is deemed as a olle tion of buyers and sellers that ex hange a good with ea h other. Ea h trader
has his or her own willingness pri e, whi h is dened as the maximum (minimum) value a buyer (seller) is willing to
pay (oer) the good. The supply and demand of the market an be formulated as statisti al expressions in terms of
willingness pri es. By introdu ing probability of realized ex hange, we an also formulate the realized market surplus.
It an be proved that only when the market is at equilibrium the realized surplus an rea h its maximum value. Thus
the market eÆ ien y an be measured by the ratio of realized surplus to its maximum value.
For a nan ial market, the eÆ ien y an not be dened in the same way. We have two reasons as follows. First, the
market surplus is not brought by all market parti ipants, who are omposed of two groups: produ ers and spe ulators.
The former bring values into the nan ial market and the latter provide liquidity to make them realized. Se ond,
the market is not at a stati state but evolves with time. The traders enter and leave the markets randomly in a
ontinuous pro ess. These distin tive hara ters of the nan ial market hinder us from measuring its eÆ ien y and
hallenge us in future resear h works.
 10

Posters

A Study in Statisti al Pro ess of Sto k Market

Jyotishka Dutta, Avishek Ghosh and Arnab Barat
Indian Statisti al Institute, 203, B. T. Road, Kolkata 700 108, India
The modeling and trials of modeling the sto k market holds an eminent part in e onomi s. Our work on erns to
a new idea around it, that is by not looking at the raw data or just the up - downs but rather a normalized data
form in spe i ut-o vibration, in other word a generalized random walk. The new distribution of the sto k pro ess
may infer in various ways, i.e. the orrelation between dierent quotes may mean something relevant. While the
distribution an be make to be a better usage if when ompared to the modeling s hemes as GARCH and ARMA
and the new model used in ase of option quotes, Geometri Brownian Motion. This omparison may lead us even
using simple approximation to sto k quotes. We may also be interested to he k out the goodness of t among the
two latter forms.

Generation of Transition Matrix from Time-Series Data

Sourav Bhatta harya
Embedded System Group, Tata Consultan y Servi es, Kolkata, India.
In pra ti e Markov hains an be used to approximate many deterministi and sto asti omplex systems with
relatively simple stru ture. Important dynami properties of the omplex system an be aptured using this approx-
imation. This fa ilitates the use of ri h theory for the omputation and interpretation of important quantities of
the omplex behaviours. Constru tion of Transition Matrix is essential to study Markovian properties. In most of
the ases the results from the s ienti measurements are one dimensional time varying in nature. In this paper I
present a simple algorithm for the generation of Transition Matrix from Time-Series data and investigate the dynami
properties of a omplex system.

Modeling Sto k Market: Expe tation Bubbles and Crashes

1 1
Varun Giri , Areejit Samal and Sitabhra Sinha
2
1 Department of Physi s and Astrophysi s, University of Delhi, Delhi - 110007, India.
2 Institute of Mathemati al S ien es, CIT Campus, Taramani, Chennai - 600113, India.

There had been lot of fo us on modelling dynami s of sto k market. Approa hes onsidered normally have an
underlying agent-agent intera tion network. Empiri al data to verify su h models is diÆ ult to obtain. We present a
model where there is no dire t intera tion among agents and they intera t only via market. They use their rationale
to minimize risk and maximize gains. This model aptures basi features of sto k market like formation of expe tation
bubbles, rashes and volatility lustering.

Modeling the bouts of a tivity in a sto k market based on trading tenden ies
Varsha Kulkarni
Department of Physi s and Astrophysi s, University of Delhi, Delhi - 110007.
The term `Sto k Market' in an abstra t way explains the me hanism by whi h trading of ompany sto ks takes pla e.
If we were to tra e the ourse of sto k market orrelations, we would nd that linkages between pri es and indi es
tighten during periods of nan ial risis or `highly volatile situations'. Volatility is basi ally a measure of market
u tuations and a volatile situation is aused not only by sudden, unanti ipated sho ks, news-bursts, e onomi and
politi al y les but also by a kind of trading pattern between agents that emerges as a umulative ee t of traders'
psy hology having no obvious pre ursors (like Bla k Friday of 1987). The study of latter forms an integral part of
the eld of Behavioral E onomi s whi h applies s ienti resear h on human and so ial ognitive biases to better
understand e onomi de isions and their ee ts on pri es, returns et . Presented here is a model based on a simple
me hanism of trading between agents in an arti ial sto k market to bring out intermittent bursts of a tivity. From
the results it may be observed that the bursts in orrelations and volumes of transa tion are not only on urrent
but ome in lusters. As the system runs, it gets into volatile situations and returns to its normal state on its
own. Although this model presents a highly idealized pi ture of a sto k market, with its rules rendering the traders
irrational, it may nevertheless be thought of as a modest representation of the self-organizing behavior of the market.
 11

Multifra tal analysis of nan ial time series using Wavelet Transform Modulus Maxima Method
A. N. Sekar Iyengar, Md. Nurujjaman, and R. Narayanan
Plasma Physi s Division, Saha Institute of Nu lear Physi s, 1/AF Bidhannagar, Kolkata 700064
Multifra tal analysis using WTMM is a well established te hnique in applied mathemati s and physi s and is gaining
popularity in nan ial resear h also. This has a lot of advantages over the stru ture fun tion method and in this
paper we will dis uss the multifra tality of the nan ial time series of various ompanies using the WTMM method.

Dynami Finan ial Analysis: Mathemati al Treatments with Risk Analysis

Chitro Majumdar
ETH-Zuri h, Switzerland; Email: majumdarethz. h
Sin e some years Dynami Finan ial Analysis (DFA) is the most ad van e modelling pro ess in todays property
and asualty industry-allowing us to develop nan ial fore asts that integrate the variability and interrelationships
of riti al fa tors ae ting our results. Our DFA models an in orporate ompanys unique ir umstan es, su h as
marketpla e, management philosophy and business operations, to give a ustomized range of what if s enarios. The
DFA tools are a series of interrelated models ea h geared to perform a spe i type of analysis that an be tailored
and applied, either singly or in on ert, to a parti ular business problem. Im exploring the resear h draft on Dynami
Finan ial Analysis (DFA), whi h is based on sto hasti simulation (also alled Monte Carlo simulation be ause it
is basi ally the only means that allows one to deal with the long time horizons present in insuran e and with the
ombination of models for a large number of intera ting risk fa tors).

Wavelet analysis of National Sto k Ex hange pri e index

P. Manimaran
1 , Prasanta K. Panigrahi2 , and Jitendra C. Parikh2
1 S hool of Physi s, University of Hyderabad, Hyderabad - 500 046, India.
2 Physi al Resear h Laboratory, Navrangpura, Ahmedabad - 380 009, India.

Re ently, we have developed a wavelet-based method for hara terizing the s aling properties of non-stationary time
series [Phys. Rev. E 72, 046120 (2005)℄. In the present work, we report the presen e of long-range orrelation and
multi-s aling behavior of National Sto k Ex hange (NSE) S&P CNX index values. Fourier analysis is also performed
to study the s aling behavior of time series and the results are ontrasted with wavelet analysis.

Empiri al observation of Movie in ome distribution

Raj Kumar Pan
Institute of Mathemati al S ien e CIT Campus, Taramani, Chennai 600113, India
We have studied the in ome distribution of movies released is US during 2000-2004. The han es of a lm be oming
a hit an be des ribed by a log-normal distribution. The nding onrms the belief that the best way to make a lm
su essful is to show it at as many inemas as possible on its opening weekend.

The importan e of being modular

Raj Kumar Pan
Institute of Mathemati al S ien e CIT Campus, Taramani, Chennai 600113, India
Most networks o urring in nature and so iety appear to have modular stru ture. Modularity may be dened as
nonuniform density of links between nodes, with ertain nodes belonging to a "module" having far more links between
ea h other than with nodes belonging to other modules. We present an appealing argument for the predominan e
of su h modular networks based on dynami al stability onsiderations. In parti ular we nd that while introdu ing
modularity in random network has a destabilising ee t, by ontrast modularity has a stabilising ee t on networks
with star like topology. As the latter kind of network is preferred in a s enario where ea h link has a ost asso iated
with it, whi h is the ase most real life situations, modularity is bound to be observed in a large number of natural
and so ial networks (in luding many o urring in e onomi s ontext).
 12

Analysis of the Volatility Pattern of the Sto k Returns

Apu Sarkar and P. Barat
Variable Energy Cy lotron Centre, 1/AF Bidhan Nagar, Kolkata 700064, India
The assessment of expe ted volatility in nan ial markets is important for portfolio sele tion and risk management
as well as for the pri ing of assets. Empiri al resear h over the past two de ades has provided mu h eviden e that
volatility is time-varying, and that hanges in volatility are predi table, to some extent, in many asset markets.
Numerous approa hes of fore asting volatility have been proposed in the literature; most of them are linked to the
autoregressive onditional heteroskedasti ity (ARCH) models originally introdu ed by Engle (1982) and generalized
(GARCH) by Bollerslev (1986). In this paper we analyze volatility dynami s in the various sto k markets using the
GARCH(1,1) model and use the result for volatility fore asting.

Statisti al analysis of sto k market u tuations: a single parametri formulation

Pragya Shukla
Department of Physi s, Indian Institute of Te hnology, Kharagpur-721302, West Bengal, India.
An understanding of the sto k-market dynami s requires a hara terisation and quanti ation of the orrelations
in the pri es of of various sto ks at a series of time-steps. To obtain the mutual orrelations between N su h sto ks,
therefore, one needs to analyze the orrelation matrix "C", with its elements as the orrelation fun tion between
two sto k-pri es, represented by the time series. However the omplexity of the sto k market leads to ompli ated
u tuation of pri es and an exa t determination of the asso iated time series is not always possible. The orrelations
an be obtained, therefore, only within a ertain distribution, resulting in "C" as a random matrix. The mutual
dependen e of various sto ks and their ee t of sto k market u tuations an thus be hara terized by the nature of
the asso iated orrelation matrix, that is, by its eigenvalue and eigenve tor statisti s.
The nature of a orrelation matrix "C" is very sensitive to the lo al intera tion among various sto ks. For example,
a relatively stronger dependen e among a few of sto ks may redu e "C" in a sparse matrix form. On the other hand,
almost equal dependen e of the sto ks makes "C" a full matrix. The statisti al spe tral analysis of various sto k
markets requires, therefore, a thorough probing of a wide range of random matrix ensembles whi h is not an easy
task. It is highly desirable, if possible, to identify a ommon mathemat al stru ture among all the ensembles and
analyze it to gain information about the ensemble-properties. Our su essful sear h in this dire tion leads to Dyson's
Brownian motion model of the eigenvalues as the ommon base. A omplete investigation of Brownian motion model
an then help us in the statisti al analysis of a wide range of sto k markets.