Self-organized model of cascade spreading

S. Gualdi, M. Medo () and Y.-C. Zhang

The European Physical Journal B: Condensed Matter and Complex Systems, 2011, vol. 79, issue 1, 91-98

Abstract: We study simultaneous price drops of real stocks and show that for high drop thresholds they follow a power-law distribution. To reproduce these collective downturns, we propose a minimal self-organized model of cascade spreading based on a probabilistic response of the system elements to stress conditions. This model is solvable using the theory of branching processes and the mean-field approximation. For a wide range of parameters, the system is in a critical state and displays a power-law cascade-size distribution similar to the empirically observed one. We further generalize the model to reproduce volatility clustering and other observed properties of real stocks. Copyright EDP Sciences, SIF, Springer-Verlag Berlin Heidelberg 2011

Date: 2011
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DOI: 10.1140/epjb/e2010-10668-8

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