Monday, August 28, 2006

Enough of Gaussian already

For those who read about the mysterious golden ratio phi, what I am about to write about now would bear some resemblance. While they are completely unrelated, I feel that both are akin in terms of their ability to explain real-world situations. So what exactly am I writing about? Yes, it’s the power-law distribution! The purest form of power-law distribution one can think of is the discrete Pareto distribution. Frequencies of words in longer texts, sizes of human settlements, values of oil reserves in oil fields, sizes of sand particles, sizes of meteorites, numbers of species per genus, areas burnt in forest fires and even sexual contact networks seem to follow this distribution. Amazing! But what interest me the most is that individual stock returns can also somewhat be approximated by this distribution as popularized by Benoît Mandelbrot and Nassim Taleb. I'll write more about this when I have the time.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home