Bar-Yam’s findings, released Feb. 13 on arXiv, are part of an emerging research field known as econophysics. It applies to economics insights from the physical world, especially from systems in which networks of interacting units produce radical collective behaviors.
Heated water turning to gas is one such behavior, known technically as a phase transition. Another is snow gathering into an avalanche. Seen through an econophysicist’s eyes, a stock market panic is an avalanche, too.
Using a phase-transition model, Bar-Yam’s group analyzed patterns of movement in the stock market. At the beginning of the 2000s, co-movement was low. On any given day, about half the stocks were moving up or down. By 2008, shortly before the crash, co-movement was absolute. People were no longer making independent decisions, but copying others.
Fuhrer’s cautions were echoed by econophysicist Tobias Preis of the Swiss Federal Institute of Technology. “One should be very careful about generalization to predict future crises,” he said. “The most important point is to quantify this risk. That would be a huge step forward.”
If co-movement does prove to be a reliable early warning signal, it’s an open question how to make use of it. “That is one of the $64,000 questions,” said Fuhrer.
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Heated water turning to gas is one such behavior, known technically as a phase transition. Another is snow gathering into an avalanche. Seen through an econophysicist’s eyes, a stock market panic is an avalanche, too.
Using a phase-transition model, Bar-Yam’s group analyzed patterns of movement in the stock market. At the beginning of the 2000s, co-movement was low. On any given day, about half the stocks were moving up or down. By 2008, shortly before the crash, co-movement was absolute. People were no longer making independent decisions, but copying others.
Fuhrer’s cautions were echoed by econophysicist Tobias Preis of the Swiss Federal Institute of Technology. “One should be very careful about generalization to predict future crises,” he said. “The most important point is to quantify this risk. That would be a huge step forward.”
If co-movement does prove to be a reliable early warning signal, it’s an open question how to make use of it. “That is one of the $64,000 questions,” said Fuhrer.
-More Here
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