Dynamic instability in a phenomenological model of correlated assets

DOI10.1088/1742-5468/2006/08/L08001zbMATH Open1459.91115arXivphysics/0508159MaRDI QIDQ5239296FDOQ5239296

Authors: Giacomo Raffaelli, Matteo Marsili 

Publication date: 22 October 2019

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

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.

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

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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)

Cites Work

• Introduction to Econophysics
• HERD BEHAVIOR AND AGGREGATE FLUCTUATIONS IN FINANCIAL MARKETS
• Theory of Financial Risk and Derivative Pricing
• Dissecting financial markets: sectors and states
• High-frequency cross-correlation in a set of stocks
• Alternation of different fluctuation regimes in the stock market dynamics
• Towards identifying the world stock market cross-correlations: DAX versus Dow Jones

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• Market dynamics when agents anticipate correlation breakdown
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• On the non-stationarity of financial time series: impact on optimal portfolio selection
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• A feedback model for the financialization of commodity markets
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