Phase Transitions in Financial Markets: An Ising Model Approach to Simulating Market Crashes

Shoaib Attar and Chaitrathejasvi Kodali

No e28mq_v1, OSF Preprints from Center for Open Science

Abstract: In this study, we explore the dynamics of financial markets by adapting the Ising model—a cornerstone of statistical physics—to simulate market crashes. By representing individual market participants as spins on a lattice, our model captures local interactions that collectively give rise to emergent phenomena analogous to phase transitions observed in magnetic systems. We investigate how varying interaction strengths, external influences, and system “temperature” affect the stability of market conditions, particularly in the vicinity of critical thresholds. Through extensive simulations, our findings reveal that minor perturbations in local agent behavior can trigger cascading effects, ultimately precipitating market crashes. These results not only demonstrate the potential of physics-inspired models to mimic complex market dynamics but also provide insights into the predictive power of critical phenomena in anticipating systemic financial instabilities. The implications of this work extend to both the theoretical understanding of market behavior and the development of more robust risk management strategies.

Date: 2025-04-23
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Persistent link: https://EconPapers.repec.org/RePEc:osf:osfxxx:e28mq_v1

DOI: 10.31219/osf.io/e28mq_v1

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