From a market of dreamers to economical shocks

Houman Owhadi

Physica A: Statistical Mechanics and its Applications, 2004, vol. 343, issue C, 583-602

Abstract: Over the past years an intense work has been undertaken to understand the origin of the crashes and bubbles of financial markets. The explanations of these crashes have been grounded on the hypothesis of behavioral and social correlations between the agents in interacting particle models or on a feedback of the stock prices on trading behaviors in mean-field models (here bubbles and crashes are seen as collective hysteria). In this paper, we will introduce a market model as a particle system with no other interaction between the agents than the fact that to be able to sell, somebody must be willing to buy and no feedback of the price on their trading behavior. We will show that this model crashes in finite estimable time. Although the age of the market does not appear in the price dynamic the population of traders taken as a whole system is maturing towards collapse. The wealth distribution among the agents follows the second law of thermodynamics and with probability one an agent (or a minority of agents) will accumulate a large portion of the total wealth, at some point this disproportion in the wealth distribution becomes unbearable for the market leading to its collapse. We believe that the origin of the collapse in our model could be of some relevance in understanding long-term economic cycles such as the Kondratiev cycle.

Keywords: Quantitative finance; Wealth distribution; Market crash (search for similar items in EconPapers)
Date: 2004
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0378437104007204
Full text for ScienceDirect subscribers only. Journal offers the option of making the article available online on Science direct for a fee of $3,000

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:343:y:2004:i:c:p:583-602

DOI: 10.1016/j.physa.2004.05.078

Access Statistics for this article

Physica A: Statistical Mechanics and its Applications is currently edited by K. A. Dawson, J. O. Indekeu, H.E. Stanley and C. Tsallis

More articles in Physica A: Statistical Mechanics and its Applications from Elsevier
Bibliographic data for series maintained by Catherine Liu ().