Physics of financial markets is a discipline that studies
financial markets
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
as
physical systems
A physical system is a collection of physical objects.
In physics, it is a portion of the physical universe chosen for analysis. Everything outside the system is known as the environment. The environment is ignored except for its effects on the ...
. It seeks to understand the nature of financial processes and phenomena by employing the
scientific method
The scientific method is an empirical method for acquiring knowledge that has characterized the development of science since at least the 17th century (with notable practitioners in previous centuries; see the article history of scientific m ...
and avoiding beliefs, unverifiable assumptions and immeasurable notions, not uncommon to economic disciplines.
Physics of financial markets addresses issues such as theory of price formation, price dynamics, market
ergodicity
In mathematics, ergodicity expresses the idea that a point of a moving system, either a dynamical system or a stochastic process, will eventually visit all parts of the space that the system moves in, in a uniform and random sense. This implies th ...
,
collective phenomena, market self-action, and market instabilities.
Physics of financial markets should not be confused with
mathematical finance
Mathematical finance, also known as quantitative finance and financial mathematics, is a field of applied mathematics, concerned with mathematical modeling of financial markets.
In general, there exist two separate branches of finance that require ...
, which are only concerned with descriptive
mathematical modeling
A mathematical model is a description of a system using mathematical concepts and language. The process of developing a mathematical model is termed mathematical modeling. Mathematical models are used in the natural sciences (such as physics, b ...
of
financial instrument
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
s without seeking to understand nature of underlying processes.
See also
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Econophysics
Econophysics is a Heterodox economics, heterodox interdisciplinary research field, applying theories and methods originally developed by physicists in order to solve problems in economics, usually those including uncertainty or stochastic processes ...
*
Social physics Social physics or sociophysics is a field of science which uses mathematical tools inspired by physics to understand the behavior of human crowds. In a modern commercial use, it can also refer to the analysis of social phenomena with big data.
Soc ...
*
Quantum economics Quantum economics is an emerging research field which applies mathematical methods and ideas from quantum physics to the field of economics. It is motivated by the belief that economic processes such as financial transactions have much in common wi ...
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Thermoeconomics
Thermoeconomics, also referred to as biophysical economics, is a school of heterodox economics that applies the laws of statistical mechanics to economic theory. Thermoeconomics can be thought of as the statistical physics of economic value and ...
*
Quantum finance
Quantum finance is an interdisciplinary research field, applying theories and methods developed by quantum physicists and economists in order to solve problems in finance. It is a branch of econophysics.
Background on instrument pricing
Financ ...
*
Kinetic exchange models of markets
Kinetic exchange models are multi-agent dynamic models inspired by the statistical physics of energy distribution, which try to explain the robust and universal features of income/wealth distributions.
Understanding the distributions of income ...
*
Brownian model of financial markets The Brownian motion models for financial markets are based on the work of Robert C. Merton and Paul A. Samuelson, as extensions to the one-period market models of Harold Markowitz and William F. Sharpe, and are concerned with defining the concept ...
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Ergodicity economics
Ergodicity economics is an approach to economic theory which emphasizes the ergodicity question, namely whether expectation values of stochastic processes are equal to their time averages. This yields alternative solutions to classic problems in ...
References
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Applied and interdisciplinary physics
Financial markets
Technical analysis