Dynamic instability in a phenomenological model of correlated assets

DOI10.1088/1742-5468/2006/08/L08001MaRDI QIDQ5239296zbMATHFDO

Authors Giacomo Raffaelli, Matteo Marsili

Publication date 22 October 2019

Published in Journal of Statistical Mechanics: Theory and Experiment (Search for Journal in Brave)

Full work available at URL https://arxiv.org/abs/physics/0508159

zbMATH Keywords

critical phenomena of socio-economic systemsmodels of financial markets

Mathematics Subject Classification ID

Applications of statistical and quantum mechanics to economics (econophysics) (91B80)

Abstract: We show that financial correlations exhibit a non-trivial dynamic behavior. We introduce a simple phenomenological model of a multi-asset financial market, which takes into account the impact of portfolio investment on price dynamics. This captures the fact that correlations determine the optimal portfolio but are affected by investment based on it. We show that such a feedback on correlations gives rise to an instability when the volume of investment exceeds a critical value. Close to the critical point the model exhibits dynamical correlations very similar to those observed in real markets. Maximum likelihood estimates of the model's parameter for empirical data indeed confirm this conclusion, thus suggesting that real markets operate close to a dynamically unstable point.

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Cites work

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• HERD BEHAVIOR AND AGGREGATE FLUCTUATIONS IN FINANCIAL MARKETS
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• Introduction to Econophysics
• Theory of Financial Risk and Derivative Pricing
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Cited in

(13)

• Stability and hierarchy of quasi-stationary states: financial markets as an example
• Consensus towards partially cooperative strategies in self-regulated evolutionary games on networks
• Crises and collective socio-economic phenomena: simple models and challenges
• A feedback model for the financialization of commodity markets
• Does expectation of correlation breakdown in financial market fulfill itself?
• Institutional investors and the dependence structure of asset returns
• Dynamic instability in generic model of multi-assets markets
• Excess covariance and dynamic instability in a multi-asset model
• Estimating phenomenological parameters in multi-assets markets
• On the non-stationarity of financial time series: impact on optimal portfolio selection
• Exploring the dynamics of financial markets: from stock prices to strategy returns
• Running for the exit: distressed selling and endogenous correlation in financial markets
• Market dynamics when agents anticipate correlation breakdown

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