Econophysics and Physical Economics

Hardcover | October 23, 2013

byPeter Richmond, Jurgen Mimkes, Stefan Hutzler

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An understanding of the behaviour of financial assets and the evolution of economies has never been as important as today. This book looks at these complex systems from the perspective of the physicist. So called "econophysics" and its application to finance has made great strides in recentyears. Less emphasis has been placed on the broader subject of macroeconomics and many economics students are still taught traditional neo-classical economics. The reader is given a general primer in statistical physics, probability theory, and use of correlation functions. Much of the mathematics that is developed is frequently no longer included in undergraduate physics courses. The statistical physics of Boltzmann and Gibbs is one of the oldestdisciplines within physics and it can be argued that it was first applied to ensembles of molecules as opposed to being applied to social agents only by way of historical accident. The authors argue by analogy that the theory can be applied directly to economic systems comprising assemblies ofinteracting agents. The necessary tools and mathematics are developed in a clear and concise manner. The body of work, now termed econophysics, is then developed. The authors show where traditional methods break down and show how the probability distributions and correlation functions can beproperly understood using high frequency data. Recent work by the physics community on risk and market crashes are discussed together with new work on betting markets as well as studies of speculative peaks that occur in housing markets. The second half of the book continues the empirical approach showing how by analogy with thermodynamics, a self-consistent attack can be made on macroeconomics. This leads naturally to economic production functions being equated to entropy functions - a new concept for economists. Issues relating tonon-equilibrium naturally arise during the development and application of this approach to economics. These are discussed in the context of superstatistics and adiabatic processes. As a result it does seem ultimately possible to reconcile the approach with non-equilibrium systems, and the ideas areapplied to study income and wealth distributions, which with their power law distribution functions have puzzled many researchers ever since Pareto discovered them over 100 years ago. This book takes a pedagogical approach to these topics and is aimed at final year undergraduate and beginning gradaute or post-graduate students in physics, economics, and business. However, the experienced researcher and quant should also find much of interest.

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From the Publisher

An understanding of the behaviour of financial assets and the evolution of economies has never been as important as today. This book looks at these complex systems from the perspective of the physicist. So called "econophysics" and its application to finance has made great strides in recentyears. Less emphasis has been placed on the br...

Peter Richmond studied physics at Queen Mary College, University of London. His career included periods in academia including the Institute of Advanced Studies, ANU Canberra, and the Physics Laboratories, University of Kent. Most recently, in particular during the period spanning the volatile financial era from 1997-2007 and the great...

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Format:HardcoverDimensions:288 pages, 9.69 × 6.73 × 0.01 inPublished:October 23, 2013Publisher:Oxford University PressLanguage:English

The following ISBNs are associated with this title:

ISBN - 10:0199674701

ISBN - 13:9780199674701

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Table of Contents

1. Introduction2. Reading financial data3. Basics of probability4. Time dependent processes and the Chapman-Kolmogorov equation5. The Langevin approach to modelling Brownian motion6. The Brownian motion model of asset prices7. Generalized diffusion processes and the Fokker-Planck equation8. Derivatives and options9. Asset fluctuations and scaling10. Models of asset fluctuations11. Risk12. Why markets crash13. Two non-financial markets14. An introduction to physical economics15. Laws of physical economics16. Markets17. A simple model of trade18. Production and economic growth19. Economics and entropy20. Approaches to non-equilibrium economics21. The distribution of wealth in society22. Conclusions and outlook

Editorial Reviews

"Adapting physics to understand economical problems may help us to develop new financial models. Science can help to change the world, not merely interpret it." --Ian Gibson, MP Norwich North, 1997-2009, Chair of House of Commons Science and Technology Committee 2001-2005, School of Biological Sciences, University of East Anglia 1965 - 1997"