Econophysics and Physical Economics

Abstract

An understanding of the behaviour of financial assets and the evolution of economies has never been as important as it is today. This book looks at these complex systems from the perspective of the physicist. So-called ‘econophysics’ and its application to finance have made great strides in recent years. 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 oldest disciplines 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 of interacting 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 how the probability distributions and correlation functions can be properly 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.

Diffusive and Arrestedlike Dynamics in Currency Exchange Markets

“…However, it has been after the works by Stanley et al [29] when the number of research papers published by physicists, in economics in general and in finance in particular, has become relevant. Other achievements such as the generalized autoregressive conditional heteroskedasticity (GARCH) model or the Black-Scholes equation helped in the rise of the field known as econophysics, which aims to employ physical theories and models in finance [30][31][32][33][34]. Still, when considering a physical scope, market dynamics is not fully understood; usually, stochastic processes, statistical mechanics, or nonlinear physics are considered when describing market dynamics, but a unified body that describes the equivalence between mass or lengths with financial magnitudes is lacking.…”

Self-organization and time-stability of social hierarchies

“…Several analyses of personal income distributions have found that the low-to-middle-income part of the distribution decays exponentially and that the high-income tail decays like a powerlaw [30,74]. Based on these analyses, various econophysics models have been propopsed with the goal of generating distributions of income with two-part shapes in which the lower-to-middle part of the income distribution follows an exponential distribution, and the upper tail follows a power-law distribution [39,80,81]. Among the models that generate a distribution of income or wealth as a self-organizing process based on interactions between individuals, several are able to produce either a power-law decay in the upper tail, or an exponential decay in the lower part of the distribution, but not both.…”

The Impact of Entropy Production and Emission Mitigation on Economic Growth

“…It cannot interfere with σ S,dis , which consists of the vectorial generalized currents and forces shown in Equation (5). Therefore, Equation (4) requires that σ S,chem > 0 and σ S,dis > 0, separately .…”