Financial Brownian Motion

The ups and downs of financial markets seem unpredictable, but physicists have shown that stochastic random-walk models can capture large-scale market dynamics, such as changes in the Dow Jones Industrial Average. What has been lacking, however, is a model that describes the interactions on smaller, trader-level scales. Researchers have now constructed such a microscopic model using data on individual traders in a high-frequency currency exchange. The team tested the model by showing that it could be used to develop a macroscopic theory that accurately captures price distribution and other market indicators.