Financial Market Risk

11 Simulation of financial turbulence

 

 

 

 

Big whirls have little whirls,

That feed on their velocity;

And little whirls have lesser whirls,

And so on to viscosity.

(Richardson, 1922)

11.1 Introduction

In this chapter, we will first address the few available basic laws of fully developed physical turbulence and interpret them in financial terms, in a similar fashion as we've interpreted the laws of fluid mechanics in terms of financial cash flows in Chapter 10. Physical turbulence is a phenomenon measured in a 4-dimensional (4D) space-time frame of reference in cubic meter seconds. Financial turbulence is, on the surface, a simpler phenomenon measured in a 2-dimensional (2D) magnitude-time reference frame of percentage seconds.

However, ...