Exogenous and endogenous market crashes as phase transitions in complex financial systems
Management School, University of Sheffield,
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Received in final form: 17 July 2012
Published online: 13 December 2012
In this paper we provide a unifying framework for a set of seemingly disparate models for exogenous and endogenous shocks in complex financial systems. Markets operate by balancing intrinsic levels of risk and return. This remains true even in the midst of transitory exogenous and endogenous shocks. Changes in market regime (bearish to bullish and bullish to bearish) can be explicitly shown to represent a phase transition from random to deterministic behaviour in prices. The resulting models refine the empirical analysis in a number of previous papers.
Key words: Statistical and Nonlinear Physics
© EDP Sciences, Società Italiana di Fisica and Springer-Verlag, 2012