Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7381302 | Physica A: Statistical Mechanics and its Applications | 2014 | 9 Pages |
Abstract
The sub-prime crisis in the U.S. reveals the limitation of diversification strategy based on mean-variance analysis. A regime switch and a turning point can be observed using a high moment representation and time-dependent transition probability. Up-down price movements are induced by interactions among agents, which can be described by the birth-death (BD) process. Financial instability is visible by dramatically increasing 3rd to 5th moments one-quarter before and during the crisis. The sudden rising high moments provide effective warning signals of a regime-switch or a coming crisis. The critical condition of a market breakdown can be identified from nonlinear stochastic dynamics. The master equation approach of population dynamics provides a unified theory of a calm and turbulent market.
Related Topics
Physical Sciences and Engineering
Mathematics
Mathematical Physics
Authors
Yinan Tang, Ping Chen,