Noise and Financial Stylized Facts: A Stick Balancing Approach

Entropy (Basel). 2023 Mar 24;25(4):557. doi: 10.3390/e25040557.

Abstract

In this work, we address the beneficial role of noise in two different contexts, the human brain and financial markets. In particular, the similitude between the ability of financial markets to maintain in equilibrium asset prices is compared with the ability of the human nervous system to balance a stick on a fingertip. Numerical simulations of the human stick balancing phenomenon show that after the introduction of a small quantity of noise and a proper calibration of the main control parameters, intermittent changes in the angular velocity of the stick are able to reproduce the most basilar stylized facts involving price returns in financial markets. These results could also shed light on the relevance of the idea of the "planetary nervous system", already introduced elsewhere, in the financial context.

Keywords: beneficial role of noise; financial markets; human stick balancing; planetary nervous system.

Grants and funding

AEB and AP acknowledge financial support of the national project PRIN 2017WZFTZP Stochastic forecasting in complex systems. AEB also acknowledges financial support of the ‘Piaceri’ research funding scheme provided by the University of Catania.