A Simple Model of Local Prices and Associated Risk Evaluation

K. Urbanowicz a, J.A. Hołyst a and P. Richmond b a Faculty of Physics, Warsaw University of Technology, Koszykowa 75, 00-662 Warsaw, Poland b School of Physics, Trinity College, Dublin 2, Ireland

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Received: 22 11 2007;

A simple spin system is constructed to simulate dynamics of asset prices and studied numerically. The outcome for the distribution of prices is shown to depend both on the dimension of the system and the introduction of price into the link measure. For dimensions below 2, the associated risk is high and the price distribution is bimodal. For higher dimensions, the price distribution is Gaussian and the associated risk is much lower. It is suggested that the results are relevant to rare assets or situations where few players are involved in the deal making process.

DOI: 10.12693/APhysPolA.114.501 PACS numbers: 89.65.Gh, 75.10.Hk