• Fulvio Baldovin

      Articles written in Pramana – Journal of Physics

    • Role of scaling in the statistical modelling of finance

      Attilio L Stella Fulvio Baldovin

      More Details Abstract Fulltext PDF

      Modelling the evolution of a financial index as a stochastic process is a problem awaiting a full, satisfactory solution since it was first formulated by Bachelier in 1900. Here it is shown that the scaling with time of the return probability density function sampled from the historical series suggests a successful model. The resulting stochastic process is a heteroskedastic, non-Markovian martingale, which can be used to simulate index evolution on the basis of an autoregressive strategy. Results are fully consistent with volatility clustering and with the multiscaling properties of the return distribution. The idea of basing the process construction on scaling, and the construction itself, are closely inspired by the probabilistic renormalization group approach of statistical mechanics and by a recent formulation of the central limit theorem for sums of strongly correlated random variables.

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