dorsal/arxiv
View SchemaDynamic instability in a phenomenological model of correlated assets
| Authors | Giacomo Raffaelli, Matteo Marsili |
|---|---|
| Categories | |
| ArXiv ID | physics/0508159 |
| URL | https://arxiv.org/abs/physics/0508159 |
| DOI | 10.1088/1742-5468/2006/08/L08001 |
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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"abstract": "We show that financial correlations exhibit a non-trivial dynamic behavior.\nWe introduce a simple phenomenological model of a multi-asset financial market,\nwhich takes into account the impact of portfolio investment on price dynamics.\nThis captures the fact that correlations determine the optimal portfolio but\nare affected by investment based on it. We show that such a feedback on\ncorrelations gives rise to an instability when the volume of investment exceeds\na critical value. Close to the critical point the model exhibits dynamical\ncorrelations very similar to those observed in real markets. Maximum likelihood\nestimates of the model\u0027s parameter for empirical data indeed confirm this\nconclusion, thus suggesting that real markets operate close to a dynamically\nunstable point.",
"arxiv_id": "physics/0508159",
"authors": [
"Giacomo Raffaelli",
"Matteo Marsili"
],
"categories": [
"physics.soc-ph",
"cond-mat.stat-mech",
"q-fin.ST"
],
"doi": "10.1088/1742-5468/2006/08/L08001",
"title": "Dynamic instability in a phenomenological model of correlated assets",
"url": "https://arxiv.org/abs/physics/0508159"
},
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