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© 2008 Faculty of Science
University of Ruhuna

RUHUNA JOURNAL OF SCIENCE
Vol. 2, September 2008, pp. 18-25
http://www.ruh.ac.lk/rjs/rjs.html
ISSN 1800-279X

Abstract. We  model  the  price  prediction  in  Sri  Lankan  stock  market  using  Ising  model  and  some  recent 

developments in statistical physics techniques. In contrast to usual agent-models, the influence does not flow 

inward from the surrounding neighbors to the centre, but spreads outward from the center to the neighbors. 

Monte Carlo simulations were used to study this problem. The analysis was based on  All share price index,  

Milanka  price  index  in  Colombo  Stock  Exchange   and  Simulated  Price  Process.  The  monthly  and  daily 

influences of the above indices to the Sri Lankan economy were also investigated. The model thus describes  

the spread of opinions traders. 

Keywords: Stock market, Price formation, Spin model

1. INTRODUCTION

A large set of economic models can be mapped to various versions of the Ising model to account for 

social  influence  in  individual  decisions.   Human  beings  are  not  spins,  they  can  learn,  adapt  the 

nature  and  strengthen   their  interactions  with  others  based  on  the  past experience.  We  use  Ising 

model to study the price prediction  in Sri Lankan financial market. This is a  mathematical model 

where state is described by the accumulation of binary variables and has been frequently used for 

discovering universality behind various social and economic systems (Stauffer, 2000, Wedagedara 

2006). The spins are interpreted as market participant’s attitude (Weron 2000, 2003). The return of 

18

 Modeling Asset Price Dynamics 

Ranasinghe P. K. C. Malmini
Department of Mathematics, University of Sri Jayewardenepura, Nugegoda,

 Sri Lanka
Correspondence: malmini@sjp.ac.lk


	1. Introduction