On the Connection between Temperature and Volatility in Ideal Agent Systems

Abstract

Models for spin systems known from statistical physics are applied by analogy in econometrics in the form of agent-based models. Researchers suggest that the state variable temperature $T$ corresponds to volatility $\sigma$ in capital market theory problems. To the best of our knowledge, this has not yet been theoretically derived, for example, for an ideal agent system. In the present paper, we derive the exact algebraic relation between $T$ and $\sigma$ for an ideal agent system and discuss implications and limitations.

Theoretical Contribution