Risk bubbles and market instability

Matteo Marsili and Giacomo Raffaelli

Physica A: Statistical Mechanics and its Applications, 2006, vol. 370, issue 1, 18-22

Abstract: We discuss a simple model of correlated assets capturing the feedback effects induced by portfolio investment in the covariance dynamics. This model predicts an instability when the volume of investment exceeds a critical value. Close to the critical point the model exhibits dynamical correlations very similar to those observed in real markets. Maximum likelihood estimates of the model's parameter for empirical data indeed confirms this conclusion. We show that this picture is confirmed by the empirical analysis for different choices of the time horizon.

Keywords: Risk; Multi-asset financial markets; Dynamical instability; Phase transitions (search for similar items in EconPapers)
Date: 2006
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:phsmap:v:370:y:2006:i:1:p:18-22

DOI: 10.1016/j.physa.2006.04.033

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