A Mathematical Model Reveals That Both Randomness and Periodicity Are Essential for Sustainable Fluctuations in Stock Prices

Abstract

Is it true that there is an implicit understanding that Brownian motion or fractional Brownian motion is the driving force behind stock price fluctuations? An analysis of daily prices and volumes of a particular stock revealed the following findings: 1) the logarithms of the moving averages of stock prices and volumes have a strong positive correlation, even though price and volume appear to be fluctuating independently of each other, 2) price and volume fluctuations are messy, but these time series are not necessarily Brownian motion by replacing each daily value by 1 or –1 when it rises or falls compared to the previous day’s value, and 3) the difference between the volume on the previous day and that on the current day is periodic by the frequency analysis. Using these findings, we constructed differential equations for stock prices, the number of buy orders, and the number of sell orders. These equations include terms for both randomness and periodicity. It is apparent that both randomness and periodicity are essential for stock price fluctuations to be sustainable, and that stock prices show large hill-like or valley-like fluctuations stochastically without any increasing or decreasing trend, and repeat themselves over a certain range.