Self-organized model of cascade spreading

Stanislao Gualdi, Matus Medo and Yi-Cheng Zhang

Papers from arXiv.org

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.

Date: 2010-03, Revised 2010-11
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Published in EPJ B 79, 91-98 (2011)

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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:1003.3114

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