Abstract
We investigate the mechanism of how the so called critical crashes happen in the stock market from a statistical physics point of view. We shall consider a modelling approach proposed in Johansen et al. (2000) to study the nature of a possible crash occurred in the Sri Lankan stock market in 1994 with a mentioning of the political events of the country that had been prevailing during that time which could be the key force that had driven the market towards the said crash. We shall determine the parameters that governed this crash and t a periodic function for the actual data based on the critical phenomena in statistical mechanics. We also propose a modelling approach via which we illustrate the critical crashes in the market are not unusual phenomena when the market is modeled as a system in statistical physics, where we employ a version of Deridda's Random Energy Model Derrida (1980), Derrida (1997) applied to the price uctuations in the nancial market.
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