Self-organized model of cascade spreading

Details Self-organized model of cascade spreading Self-organized model of cascade spreading

2010-03-16

arxiv.org/abs/1003.3114v3

EPJ B 79, 91-98 (2011)

Physics

Physics and Society

8 pages, 6 figures

Scientific paper

10.1140/epjb/e2010-10668-8

We study simultaneous price drops of real stocks and show that for high drop thresholds they follow a power-law distribution. To reproduce these collective downturns, we propose a minimal self-organized model of cascade spreading based on a probabilistic response of the system elements to stress conditions. This model is solvable using the theory of branching processes and the mean-field approximation. For a wide range of parameters, the system is in a critical state and displays a power-law cascade-size distribution similar to the empirically observed one. We further generalize the model to reproduce volatility clustering and other observed properties of real stocks.

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