Identifying financial crises in real time

Eder Lucio da Fonseca, Fernando F. Ferreira, Paulsamy Muruganandam and Hilda A. Cerdeira

Physica A: Statistical Mechanics and its Applications, 2013, vol. 392, issue 6, 1386-1392

Abstract: Following the thermodynamic formulation of a multifractal measure that was shown to enable the detection of large fluctuations at an early stage, here we propose a new index which permits us to distinguish events like financial crises in real time. We calculate the partition function from which we can obtain thermodynamic quantities analogous to the free energy and specific heat. The index is defined as the normalized energy variation and it can be used to study the behavior of stochastic time series, such as financial market daily data. Famous financial market crashes–Black Thursday (1929), Black Monday (1987) and the subprime crisis (2008)–are identified with clear and robust results. The method is also applied to the market fluctuations of 2011. From these results it appears as if the apparent crisis of 2011 is of a different nature to the other three. We also show that the analysis has forecasting capabilities.

Keywords: Time series analysis; Fluctuation phenomena; Interdisciplinary physics; Econophysics; Financial markets; Fractals (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:392:y:2013:i:6:p:1386-1392

DOI: 10.1016/j.physa.2012.11.006

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