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Exchange rate behaves like particles in a molecular fluid
Date:3/13/2014

When scientists observe minute particles like nanoparticles or bacteria in fluid under a microscope, they don't see a motionless image. What they do see are particles making the tiniest irregular twitches not unlike the nervous ups-and-downs of market prices and exchange rates. These two forms of random twitching microparticles in fluid and price developments on the financial market are not just similar at first sight as a Japanese-Swiss team has now demonstrated. The underlying mechanism is the same too.

Brownian motion, the name given by scientists to the microtwitching of particles in fluid, results from the impact of the universal thermal agitation of the individual molecules in the fluid. The renowned French mathematician Louis Bachelier observed back at the beginning of the 20th century that there were parallels between this random walk behavior and exchange rates. However, it is only now that Didier Sornette, Professor of Entrepreneurial Risks at ETH Zurich together with colleagues from Japan, has been able to demonstrate exact correlations between the two. The scientists have published their work in the reputed journal "Physical Review Letters".

Stock exchange meets Einstein's theorem

"Microparticles are surrounded and moved around by the molecules in the fluid. Similarly, the price at which securities or currencies are traded on a financial market should not be examined in isolation either", explains Sornette. It is far more the case that this price is embedded at all times in a larger whole, in the total sum of buying and selling orders of stockbroker's clients. When the number of these orders is far higher than that of the actual transactions, many bids won't lead to any transactions. This is the case, for instance, when an interested party is only willing to pay a relatively low price for a security but no holder is willing to sell for such a low price. Or when someone wants to sell a security for a relativ
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Contact: Didier Sornette
dsornette@ethz.ch
41-446-328-917
ETH Zurich
Source:Eurekalert

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