Market Dynamics of Information Avalanches

TL;DR

This paper models financial market dynamics using a sandpile analogy, linking information avalanches to price volatility and revealing a structural tension between market efficiency and risk-adjusted returns.

Contribution

It introduces a sandpile-based model of information flow in markets, connecting self-organized criticality to asset price changes and highlighting inherent market tensions.

Findings

Avalanche sizes follow a scaling law linked to volatility.

The model reproduces stylized facts of financial markets.

Identifies a tension between non-arbitrage and constant Sharpe ratio.

Abstract

Financial markets convert the incremental arrival of information into asset price changes. In a sandpile model grains of sand represent bits of data, and the size of an avalanche, governed by a scaling law, is linked to price volatility. While this model of self-organized criticality reproduces stylized facts, it also identifies a structural tension between the non-arbitrage condition and price adjustments consistent with a constant Sharpe ratio.