  It is now well established empirically that financial price changes are
distributed according to a power law, with cubic exponent. This is a
fascinating regularity, as it holds for various classes of securities, on
various markets, and on various time scales. The universality of this law
suggests that there must be some basic, general and stable mechanism behind it.
The standard (neoclassical) paradigm implies no such mechanism. Agent-based
models of financial markets, on the other hand, exhibit realistic price
changes, but they involve relatively complicated, and often mathematically
intractable, mechanisms. This paper identifies a simple principle behind the
power law: the feedback intrinsic to the very idea of speculation, namely
buying when one expects a price rise (and selling when one expects a price
fall). By this feedback, price changes follow a random coefficient
autoregressive process, and therefore they have a power law by Kesten theorem.
