Statistical Physics and Economic Fluctuations

Abstract

We present an overview of recent research—much of it caxried out in collaborations between economists and physicists—which is focussed on applying ideas of statistical physics to try to better understand puzzles regarding economic fluctuations. One of these puzzles is how to describe outliers, phenomena that lie outside of patterns of statistical regularity. We review evidence consistent with the possibility that such outliers may not exist. This possibility is supported by extensive numerical analysis of a huge database, containing every trade, which results in power law descriptions of a number of quantities whose fluctuations are of interest. It is also supported by recent analysis by Plerou et al. of a database containing the bid, ask, and sale price of each trade of every stock. Further, the Plerou et al. analysis is consistent with a possible theoretical framework for understanding economic fluctuations in which a financial market alternates between being in an “equilibrium phase” where market behavior is split roughly equally between buying and selling, and an “out-of-equilibrium phase” where the market is mainly either buying or selling.