Abstract
Predicting panic is of critical importance in many areas of human and animal behavior, notably in the context of economics. The recent financial crisis is a case in point. Panic may be due to a specific external threat or self-generated nervousness. Here we show that the recent economic crisis and earlier large single-day panics were preceded by extended periods of high levels of market mimicry—direct evidence of uncertainty and nervousness, and of the comparatively weak influence of external news. High levels of mimicry can be a quite general indicator of the potential for self-organized crises.
Highlights
The 2007–2008 financial crash led to renewed interest in the development of models capable of predicting and mitigating the severity of future crises, but the question of whether it is possible to predict financial crises has a long history
We describe our results beginning from empirical observations, motivate the construction of the quantitative model in the context of prior economic theory, and compare the results of analytic solution of the model with the empirical observations
In previous work [24] [25], we provided exact statistical distributions for the dynamic response of influence networks subjected to external perturbations—a problem of great methodological and practical importance
Summary
The 2007–2008 financial crash led to renewed interest in the development of models capable of predicting and mitigating the severity of future crises, but the question of whether it is possible to predict financial crises has a long history. The literature generally uses volatility and the correlation between stock prices to characterize risk [11, 15,16,17, 36,37,38,39,40]. These measures are sensitive to the magnitude of price movement and increase dramatically when there is a market crash. On average, volatility increases subsequent to price declines, but do not show that higher volatility is followed by price declines [41,42,43,44]
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