Jean-Philippe Bouchaud, Capital Fund Management & Ecole Polytechnique

Statistical Physics Approaches to Economics and Finance (13.5h)

1. Introduction.

Economics needs a scientific revolution • What is “econophysics”? • Strengths and weaknesses of econophysics • What have econophysicists achieved?

2. Empirical work and stylized facts in economics and finance

The dynamics of price in financial markets (excluding microstructure) • Pareto distribution of wealth and sizes • Fluctuations • Networks

3. Price formation and microstructure

Order book dynamics • Order flow dynamics • Impact and liquidity • Is price dynamics exogenous or endogenous?

4. Correlations and large dimension models

Risk, correlation matrices and portfolio optimisation • Random Matrix theory: bulk and edge properties • Eigenvalue and eigenvector cleaning • Generalized correlations: leader-laggers and sunspot phenomena • Extreme risks, non-linear correlations and copulas • The need for “structural” models

5. Theoretical models of collective behaviour in economics and finance

Rational agents and models of decision and choice • Models of bubbles, bursts and avalanches • Models of fads and opinion swings: the RFIM • Models of self referential behaviour • Models of competition – the minority game • Models of instabilities • Agent based models

6. Theoretical models of growth and exchange

Additive/multiplicative growth • Death and coalescence • Kinetic models of wealth • Non equilibrium versus equilibrium

7. The world of financial derivatives

The worrying ways of financial engineering • Option pricing: welcome to a non Black-Scholes world • Volatility modelling: GARCH and multiscale/multifractal frameworks • The hedge Monte-Carlo method • Default probabilities and extreme risk modelling • The need for “second generation” models