Trading leads to scale-free self-organization
M. Ebert, W. Paul

TL;DR
This paper demonstrates that trading processes under simple assumptions naturally lead to a self-organized market exhibiting Pareto-like wealth distribution and scale-free return fluctuations.
Contribution
It reveals that trading dynamics alone can produce scale-free market behavior and wealth distribution without additional complex mechanisms.
Findings
Wealth distribution among market participants follows a Pareto law.
Return fluctuations exhibit scale-free, heavy-tailed behavior.
Market self-organization emerges from basic trading assumptions.
Abstract
Financial markets display scale-free behavior in many different aspects. The power-law behavior of part of the distribution of individual wealth has been recognized by Pareto as early as the nineteenth century. Heavy-tailed and scale-free behavior of the distribution of returns of different financial assets have been confirmed in a series of works. The existence of a Pareto-like distribution of the wealth of market participants has been connected with the scale-free distribution of trading volumes and price-returns. The origin of the Pareto-like wealth distribution, however, remained obscure. Here we show that it is the process of trading itself that under two mild assumptions spontaneously leads to a self-organization of the market with a Pareto-like wealth distribution for the market participants and at the same time to a scale-free behavior of return fluctuations. These assumptions…
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Taxonomy
TopicsComplex Systems and Time Series Analysis · Evolutionary Game Theory and Cooperation
