## Practical Fruits of Econophysics: Proceedings of The Third Nikkei Econophysics SymposiumSome economic phenomena are predictable and controllable, and some are impos sible to foresee. Existing economic theories do not provide satisfactory answers as to what degree economic phenomena can be predicted and controlled, and in what situations. Against this background, people working on the financial front lines in real life have to rely on empirical rules based on experiments that often lack a solid foundation. "Econophysics" is a new science that analyzes economic phenomena empirically from a physical point of view, and it is being studied mainly to offer scientific, objective and significant answers to such problems. This book is the proceedings of the third Nikkei symposium on ''Practical Fruits of Econophysics," held in Tokyo, November 9-11, 2004. In the first symposium held in 2000, empirical rules were established by analyzing high-frequency finan cial data, and various kinds of theoretical approaches were confimied. In the second symposium, in 2002, the predictability of imperfections and of economic fluctua tions was discussed in detail, and methods for applying such studies were reported. The third symposium gave an overview of practical developments that can immedi ately be applied to the financial sector, or at least provide hints as to how to use the methodology. |

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### Contents

Rare and NotSoRare Events in Finance | 2 |

NonTrivial Scaling of Fluctuations in the Trading Activity of NYSE | 19 |

Dynamics and Predictability of Fluctuations in DollarYen Exchange Rates | 24 |

Temporal Characteristics of Moving Average of Foreign Exchange Markets | 29 |

Characteristic Market Behaviors Caused by Intervention in a Foreign Exchange Market | 33 |

the Difference between the Reaction of the Emerging and Mature Markets to Crashes | 38 |

Application to Risk Estimation | 43 |

Recurrence Analysis Near the NASDAQ Crash of April 2000 | 52 |

A GameTheoretic Stochastic Agents Model for Enterprise Risk Management | 210 |

Correlation and Risk Management | 214 |

Blackouts Risk and FatTailed Distributions | 215 |

Portfolio Selection in a Noisy Environment Using Absolute Deviation as a Risk Measure | 220 |

Application of PCA and Random Matrix Theory to Passive Fund Management | 226 |

Testing Methods to Reduce Noise in Financial Correlation Matrices | 231 |

Application of Noise Level Estimation for Portfolio Optimization | 236 |

Method of Analyzing Weather Derivatives Based on LongRange Weather Forecasts | 241 |

Modeling a Foreign Exchange Rate Using Moving Average of YenDollar Market Data | 57 |

Systematic Tuning of Optimal WeightedMovingAverage of YenDollar Market Data | 62 |

Power Law and its Transition in the Slow Convergence to a Gaussian in the SP500 index | 67 |

Empirical Study of the Market Impact in the Tokyo Stock Exchange | 72 |

Econophysics to Unravel the Hidden Dynamics of Commodity Markets | 77 |

A Characteristic Time Scale of Tick Quotes on Foreign Currency Markets | 82 |

Predictability of Markets | 87 |

Order Book Dynamics and Price Impact | 88 |

Prediction Oriented Variant of Financial LogPeriodicity and Speculating about the Stock Market Development until 2010 | 93 |

Quantitative Forecasting and Modeling Stock Price Fluctuations | 99 |

Anticipating Market Crashes? | 107 |

Short Time Segment Price Forecasts Using Spline Fit Interactions | 111 |

Successful Price Cycle Forecasts for SP Futures Using TF3 a Pattern Recognition Algorithms Based on the KNN Method | 116 |

The Hursts Exponent in Technical Analysis Signals | 121 |

Financial Markets Dynamic Distribution Function Predictability and Investment DecisionMaking FMDDF | 126 |

Market Cycle Turning Point Forecasts by a TwoParameter Learning Algorithm as a Trading Tool for SP Futures | 131 |

Mathematical Models | 136 |

the Mean Exit Time | 137 |

Discretized ContinuousTime Hierarchical Walks and Flights as Possible Bases of the NonLinear LongTerm Autocorrelations Observed in Highfreque... | 142 |

Evidence for Superdiffusion and Momentum in Stock Price Changes | 147 |

Searching for the Price Equation | 152 |

An AgentBased Model of Financial Returns in a Limit Order Market | 158 |

Stock Price Process and the LongRange Percolation | 163 |

What Information is Hidden in Chaotic Time Series? | 168 |

Analysis of Evolution of Stock Prices in Terms of Oscillation Theory | 173 |

Simple Stochastic Modeling for Fat Tails in Financial Markets | 178 |

Agent Based Simulation Design Principles Applications to Stock Market | 183 |

Role of Market Leaders and Fundamental Prices | 189 |

Dynamics of Interacting Strategies | 194 |

Emergence of TwoPhase Behavior in Markets through Interaction and Learning in Agents with Bounded Rationality | 200 |

Explanation of Binarized Tick Data Using Investor Sentiment and Genetic Learning | 205 |

A TimeDependent Measure of Asset Performance | 246 |

Clustering Financial Time Series | 252 |

Risk Portofolio Management Under Zipf Analysis Based Strategies | 257 |

MacroPlayers in Stock Markets | 262 |

Conservative Estimation of Default Rate Correlations | 272 |

Are Firm Growth Rates Random? Evidence from Japanese Small Firms | 277 |

Trading Volume and Information Dynamics of Financial Markets | 283 |

Random Matrix Theory Applied to Portfolio Optimization in Japanese Stock Market | 286 |

Growth and Fluctuations for SmallBusiness Firms | 291 |

Networks and Wealth Distributions | 296 |

The Skeleton of the Shareholders Networks | 297 |

Financial Market A Network Perspective | 302 |

Change of Ownership Networks in Japan | 307 |

G7 Country Gross Domestic Product GDP Time Correlations A Graph Network Analysis | 312 |

Dependence of Distribution and Velocity of Money on Required Reserve Ratio | 317 |

Prospects for Money Transfer Models | 322 |

Inequalities of Wealth Distribution in a Society with Social Classes | 327 |

Analyzing Money Distributions in Ideal Gas Models of Markets | 333 |

Unstable Periodic Orbits and Chaotic Transitions among Growth Patterns of an Economy | 339 |

PowerLaw Behaviors in High Income Distribution | 344 |

The PowerLaw Exponent and the Competition Rule of the High Income Model | 349 |

New Ideas | 354 |

Personal Versus Economic Freedom | 355 |

Complexity in an Interacting System of Production | 360 |

Four Ingredients for New Approaches to Macroeconomic Modeling | 366 |

Theory and Practice | 371 |

Analysis of Retail Spatial Market System by the Constructive Simulation Method | 376 |

QuantumMonadology Approach to Economic Systems | 381 |

Visualization of Microstructures of Economic Flows and Adaptive Control | 386 |

### Common terms and phrases

agents algorithm analysis analyze applied assets attractor autocorrelation behavior blackouts chaotic clusters competition complex correlation corresponding crash CTRW cycle defined denote dynamics economic Econophysics eigenvalues empirical equation estimation evolution exponent financial markets firms fluctuations forecast foreign exchange market Fractals Gaussian growth herding behavior income interactions interval intervention introduce investment investor Japan Kmart limit order loss function Mantegna matrix method minimization moving average NASDAQ networks noise observed parameters PDFS period phase space Phys Physics Plerou plot portfolio optimization power law prediction price changes probability random matrix theory random walk Recurrence Plot required reserve ratio reserve ratio risk scale sector shareholding shown simulation spline fits standard deviation Stanley statistical stochastic stock market stock price strategy Takayasu theory Tokyo trading transaction trend University volatility volume wealth distribution weather derivatives Yen-Dollar

### Popular passages

Page 18 - MHR Stanley, LAN Amaral, SV Buldyrev, S. Havlin, H. Leschhorn, P. Maass, MA Salinger, and HE Stanley, "Scaling Behavior in the Growth of Companies,