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Related Experiment Videos

"Price-quakes" shaking the world's stock exchanges.

Jørgen Vitting Andersen1, Andrzej Nowak, Giulia Rotundo

  • 1CNRS, Institut Non Linéaire de Nice, Sophia Antipolis, Valbonne, France. vitting@unice.fr

Plos One
|November 11, 2011
PubMed
Summary

Financial markets exhibit a non-linear response to events, similar to earthquakes, due to trader change blindness. This phenomenon, termed pricequakes, can lead to systemic risk, but a new model may help prevent it.

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Area of Science:

  • Financial economics
  • Complex systems analysis
  • Behavioral finance

Background:

  • Systemic risk in financial markets gained prominence after the 2008 global financial crisis.
  • The International Monetary Fund (IMF) highlighted a lack of adequate tools and research on systemic risk.
  • Understanding disruption propagation across financial markets is crucial.

Purpose of the Study:

  • To investigate the non-linear dynamics of financial markets.
  • To explore the role of trader change blindness in market behavior.
  • To develop a predictive model for stock exchange pricing and systemic risk.

Main Methods:

  • Empirical data analysis of global market responses to events.
  • Development of a network model of world stock exchanges incorporating change blindness.
  • Analogy drawn to physics models of tectonic plate movements (slip-stick dynamics).

Main Results:

  • Financial markets demonstrate a non-linear threshold response to events.
  • Trader change blindness, ignoring small changes and overreacting to large ones, contributes to cascading events (pricequakes).
  • The proposed model accurately predicts stock exchange pricing based on global market performance and change blindness.

Conclusions:

  • Stock exchange price dynamics mirror earthquake-like stress build-up and release.
  • Non-linear response allows classification of price movements as internally or externally driven.
  • The model offers insights into systemic risk origins and potential prevention strategies.