Statistical Signatures in Times of Panic: Markets as a Self-Organizing System

Details Statistical Signatures in Times of Panic: Markets as a Self-Organizing System Statistical Signatures in Times of Panic: Markets as a Self-Organizing System

2009-08-02

arxiv.org/abs/0908.0111v2

Economy

Quantitative Finance

Statistical Finance

32 pages

Scientific paper

We study properties of the cross-sectional distribution of returns. A significant anti-correlation between dispersion and cross-sectional kurtosis is found such that dispersion is high but kurtosis is low in panic times, and the opposite in normal times. The co-movement of stock returns also increases in panic times. We define a simple statistic $s$, the normalized sum of signs of returns on a given day, to capture the degree of correlation in the system. $s$ can be seen as the order parameter of the system because if $s= 0$ there is no correlation (a disordered state), whereas for $s \ne 0$ there is correlation among stocks (an ordered state). We make an analogy to non-equilibrium phase transitions and hypothesize that financial markets undergo self-organization when the external volatility perception rises above some critical value. Indeed, the distribution of $s$ is unimodal in normal times, shifting to bimodal in times of panic. This is consistent with a second order phase transition. Simulations of a joint stochastic process for stocks use a multi timescale process in the temporal direction and an equation for the order parameter $s$ for the dynamics of the cross-sectional correlation. Numerical results show good qualitative agreement with the stylized facts of real data, in both normal and panic times.

Affiliated with

Also associated with

No associations

Rating

Statistical Signatures in Times of Panic: Markets as a Self-Organizing System does not yet have a rating. At this time, there are no reviews or comments for this scientific paper.

If you have personal experience with Statistical Signatures in Times of Panic: Markets as a Self-Organizing System, we encourage you to share that experience with our LandOfFree.com community. Your opinion is very important and Statistical Signatures in Times of Panic: Markets as a Self-Organizing System will most certainly appreciate the feedback.

Rate now

Comments { 0 }

Profile ID: LFWR-SCP-O-579680