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How Do Microscopic Models of Financial Markets Explain?

Kuhlmann, Meinard (2006) How Do Microscopic Models of Financial Markets Explain? In: [2006] Models and Simulations (Paris, 2006). (Unpublished)

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    Abstract

    Financial theory is in trouble. Market crashes and high volatility are only too familiar to everyone, although the standard theories predict that they hardly ever occur. According to the well-known and (partly due to its simplicity) still widely used random-walk model, the probabilities for price changes of, say, stocks should result in a Gaussian distribution. However, experience tells us that large changes occur far more often than ‘allowed’ by a Gaussian distribution. New models are needed which lead to realistic probability distributions. ‘Econophysicists’ are particularly active in this field by constructing microscopic models of financial markets on the basis of various ideas and tools from physics. But in which sense do these models contribute scientific explanations? In this paper I will investigate what and how one exemplary econophysics model explains.


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    Item Type: Conference or Workshop Item (UNSPECIFIED)
    Keywords: Scientific explanation; complex systems; econophysics; mechanisms; models
    Subjects: General Issues > Models and Idealization
    Specific Sciences > Economics
    General Issues > Explanation
    Specific Sciences > Complex Systems
    Specific Sciences > Physics > Statistical Mechanics/Thermodynamics
    Conferences and Volumes: [2006] Models and Simulations (Paris, 2006)
    Depositing User: Meinard Kuhlmann
    Date Deposited: 11 Jun 2006
    Last Modified: 07 Oct 2010 11:14
    Item ID: 2788
    Public Domain: No
    Conference Date: 12/06/06-13/06/06
    Conference Location: Paris
    URI: http://philsci-archive.pitt.edu/id/eprint/2788

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