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Investigation on financial crises with the negative-information-propagation-induced model

Feng-Hua Fan, Yanbin Deng and Yong-Chang Huang

Physica A: Statistical Mechanics and its Applications, 2017, vol. 470, issue C, 94-104

Abstract: We first argue about the similarity between the propagation phenomenon of negative information about potential deterioration of economic situation in group of investors and the propagation phenomenon of infectious disease in crowd Applying the negative-information-propagation-induced model built based on above argument, we investigate the relationship between the generation of financial crises and propagation effects of negative information We introduce the discrimination parameter to distinguish whether or not negative information will be propagated extensively in group of investors. We also introduce the target critical value of financial crises. By comparing the theoretically predicted ratio of the long term projected number of total investors to the total number of investors at some time as initial time with target critical value of financial crises, the model can provide real-time monitoring of whether the curve of total number of investors is progressing toward the direction of generating financial crises or running on track of financial markets safety. If at some time this ratio is computed to be less than the target critical value of financial crises, governments can take relevant measures to prevent the generation of financial crises in advance Governments’ interference helps to recover the confidence of investors so that they never will again believe in negative information to continue their investment. Results from theoretical and numerical analysis show that the number of investors who hold the belief of potential deterioration of economic situation, and the number of investors who withdraw capital and depart from financial markets for avoiding business loss when governments make appropriate interference are lowered compared to that without appropriate governments’ interference. The results show the effectiveness of governments in preventing financial crises from the viewpoint of the negative information-propagation-induced model, namely governments’ prevention against financial crises can reduce the possibility of the generation of financial crises.

Keywords: Financial crises; Number of investors; Negative information; The negative information-propagation-induced model (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:phsmap:v:470:y:2017:i:c:p:94-104