On a Universal Mechanism for Long Ranged Volatility Correlations

We propose a general interpretation for long-range correlation effects in the activity and volatility of financial markets. This interpretation is based on the fact that the choice between ‘active’ and ‘inactive’ strategies is subordinated to random-walk like processes. We numerically demonstrate our scenario in the framework of simplified market models, such as the Minority Game model with an inactive strategy. We show that real market data can be surprisingly well accounted for by these simple models. A well documented ‘stylized fact’ of financial markets is volatility clustering [1, 2, 3, 4]. Figure 1 compares the time series of the daily returns of the Dow-Jones index since 1900 and that of a Brownian random walk. Two features are immediately obvious to the eye: the volatility does indeed