Supplement of differential equations of fraction order for forecasting of financial markets

Abstract

In this paper, the analysis of capital markets takes place using the advection-diffusion equation. It should be noted that the methods used in modern theoretical physics have long been used in the analysis of capital markets. In particular, the Fokker-Planck equation has long been used in finding the probability density function of the return on equity. Throughout the study, a number of authors have considered the supplement of the Fokker-Planck equation in the forecasting of equity markets, as a differential equation of second order. In this paper, the first time capital markets analysis is performed using the fractional diffusion equation. The rationale is determined solely by the application nature, which consists in generation of trading strategy in equity markets with the supplement of differential equation of fractional order. As the subject for studies, the differential operator of fractional order in partial derivatives was chosen – the Fokker-Planck equation. The general solutions of equation are the basis for the forecast on the exchange rate of equities included in the Dow Jones Index Average (DJIA).