An explanation for the universal 3.5 power-law observed in currency markets

Abstract

We present a mathematical theory to explain a recent empirical finding in the Physics literature (Zhao et al., 2013) in which the distributions of waiting-times between discrete events were found to exhibit power-law tails with an apparent universal exponent: α∼3.5. This new theory provides the first ever qualitative and quantitative explanation of Zhao et al.’s surprising finding. It also provides a mechanistic description of the origin of the observed universality, assigning its cause to the emergence of dynamical feedback processes between evolving clusters of like-minded agents. Keywords: Complex systems, Econophysics, Collective, Power law