Random trade timing and power-law tails in realized prices
Fuente:
arXiv
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| Formato: | Preprint |
| Publicado: |
2026
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| _version_ | 1866917456549773312 |
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| author | Seo, Won-Ki |
| author_facet | Seo, Won-Ki |
| contents | This paper studies stochastic mechanisms under which light-tailed latent price dynamics yield realized prices with power-law tails. The realized price is modeled as $P_T=e^{X_T}$, where $X$ is a Markov-modulated Lévy process and $T$ is the random time of the next trade. We consider two trade-timing environments. In the intertrade-incidence model, trades occur on a discrete grid with type-dependent probabilities. In the intertrade-time model, the waiting time to the next trade is generalized Erlang, allowing for heterogeneous arrival rates and transaction-completion delays. We show that random trade timing can generate Pareto-type tails, possibly with a logarithmic correction, in realized prices even when the latent price process is light-tailed. In both models, the tail exponent is determined by the least frequent trading type, while the proportions of faster-trading types affect only the scale constant. We also provide sufficient conditions under which these Pareto-type tails sharpen to exact Paretian tails. These results identify random trade timing and heterogeneity in trading behavior as a general mechanism for generating power-law tails in realized prices. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2605_01878 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Random trade timing and power-law tails in realized prices Seo, Won-Ki Probability 60G51, 60J27 This paper studies stochastic mechanisms under which light-tailed latent price dynamics yield realized prices with power-law tails. The realized price is modeled as $P_T=e^{X_T}$, where $X$ is a Markov-modulated Lévy process and $T$ is the random time of the next trade. We consider two trade-timing environments. In the intertrade-incidence model, trades occur on a discrete grid with type-dependent probabilities. In the intertrade-time model, the waiting time to the next trade is generalized Erlang, allowing for heterogeneous arrival rates and transaction-completion delays. We show that random trade timing can generate Pareto-type tails, possibly with a logarithmic correction, in realized prices even when the latent price process is light-tailed. In both models, the tail exponent is determined by the least frequent trading type, while the proportions of faster-trading types affect only the scale constant. We also provide sufficient conditions under which these Pareto-type tails sharpen to exact Paretian tails. These results identify random trade timing and heterogeneity in trading behavior as a general mechanism for generating power-law tails in realized prices. |
| title | Random trade timing and power-law tails in realized prices |
| topic | Probability 60G51, 60J27 |
| url | https://arxiv.org/abs/2605.01878 |