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.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callMore From: Physica A: Statistical Mechanics and its Applications
Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
