Core papers on financial market fluctuations

Data provided by Thomson Reuters’ Essential Science Indicators database, 1 January 1998-30 June 2008

November 13, 2008

Paper Author(s), JournalCitations
1 A theory of power law distributions in financial market fluctuations X. Gabaix, P. Gopikrishnan, V. Plerou and H.%u2009E. Stanley Nature, 423(6937), 267-70, 15 May 2003 Massachusetts Institute of Technology, Dept of Economics, Cambridge, MA; Boston University, Dept of Physics, Boston131
2 Fluctuations and response in financial markets: the subtle nature of “random” price changes J. P. Bouchaud, Y. Gefen, M. Potters and M. Wyart Quantitative Finance, 4(2), 176-190, April 2004 CEA, Gif Sur Yvette, France; Capital Fund Management, Science and Finance, Levallois Perret, France; Weizman Institute of Science, Dept of Condensed Matter Physics, Rehovot, Israel36
3 What really causes large price changes%3F J. D. Farmer, L. Gillemot, F. Lillo and A. Sen Quantitative Finance, 4(4), 383-97, August 2004 Santa Fe Institute, Santa Fe, NM; Budapest University of Technology and Economics, Budapest; University of Palermo, National Institute of Condensed Matter Physics, Palermo; University of Chicago, Dept of Mathematics, Chicago, IL 26
4 Institutional investors and stock market volatility X. Gabaix, P. Gopikrishnan, V. Plerou and H. E. Stanley Quarterly Journal of Economics, 121(2), 461-504, May 2006 Massachusetts Institute of Technology, Dept of Economics, Cambridge, MA; National Bureau of Economic Research, Cambridge, MA; Boston University, Dept of Physics, Boston 22
5 Tests of scaling and universality of the distributions of trade size and share volume: Evidence from three distinct markets V. Plerou and H.%u2009E. Stanley Physical Review E, 76(4), article -046109, Part 2, October 2007 Boston University, Dept of Physics, Boston 3
Measurement of the relationship between documents can be performed in many ways. One method of assessing similarity uses shared references, a concept known as bibliographic coupling. Another, introduced independently in 1973 by H. G. Small and I. V. Marshakova-Shaikevich, is co-citation. Using this technique, two documents are said to be related if they are cited together. The greater the degree of co-citation, the closer the intellectual content of the two works, so the theory goes. Thomson Reuters has developed the co-citation methodology over the years and now employs it in its Essential Science Indicators database to construct so-called research fronts. A research front consists of a group of highly cited papers that are co-cited.

Lately, Thomson Reuters has been monitoring the new field of econophysics, which uses tools of statistical physics to analyse socio-economic problems. Current events suggested a search for research fronts on volatility in the financial markets. The five papers listed above are the core papers (those highly co-cited) by 218 papers, the whole forming a research front entitled “Financial Market Fluctuations”. The average age of the core papers is 2005, suggesting a new, rapidly developing area with a young foundation literature.

In October 2006, Thomson Reuters interviewed J. Doyne Farmer and Fabrizio Lillo, two of the authors of the third-ranked paper above (see They summarised their findings: “The paper describes the discovery that large price changes due to individual transactions are strongly affected by an imbalance between liquidity supply and liquidity demand. It’s a common belief that large price changes are originated by large transaction volume. We empirically found that even small volumes can give rise to large price changes. By investigating the origin of this behaviour, we found that this happens when there is a lack of liquidity in the market. In these conditions the market is in a somewhat unstable state and even a small perturbation – ie, a small transaction – can have a significant effect on the price.” When asked about the social implications of their work, they replied: “Clearly financial markets are an important component of our societies, thus any result on this topic is potentially useful in socio-political terms.

In particular, our research helps to clarify the origin of large price fluctuations, such as occurs during financial crashes. It is possible thus that the results of our research could help market regulators in improving market rules in order to control market volatility and to avoid extreme events.”

Now, two years later, their comments on the importance of liquidity and market regulations have a somewhat eerie quality.

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