Complexity researchers who study the behavior of stock markets may have identified a signal that precedes crashes.
They say the telltale sign is a measure of co-movement, or the likelihood of stocks to move in the same direction. When a market is healthy, co-movement is low. But in the months and years before a crash, co-movement seems to grow.
Regardless of whether stock prices go up or down or stay the same, they do so in tandem. People are copying each other, and a small nudge can send everyone in the same direction. The system appears primed for collapse.
“One of the most important things happening now is that economists are trying to understand, what is systemic risk? When is the entire system vulnerable to disaster? Our results show that we have a direct, unambiguous measure of that vulnerability,” said Yaneer Bar-Yam, president of the New England Complex Systems Institute.
Seen through an econophysicist’s eyes, a stock market panic is an avalanche.
Bar-Yam’s findings, released Feb. 13 on arXiv, are part of an emerging research field known as econophysics. It applies to economics insights from the physical world, especially from systems in which networks of interacting units produce radical collective behaviors.
Heated water turning to gas is one such behavior, known technically as a phase transition. Another is snow gathering into an avalanche. Seen through an econophysicist’s eyes, a stock market panic is an avalanche, too.
Many improbable occurrences conspired to create Earth’s human-friendly design, and they would indeed be puzzling if ours were the only solar system in the universe. But today we know of hundreds of other solar systems, and few doubt that there exist countless more among the billions of stars in our galaxy. Planets of all sorts exist, and obviously, when the beings on a planet that supports life examine the world around them, they are bound to find that their environment satisfies the conditions they require to exist.
Many people would like us to use these coincidences as evidence of the work of God. The idea that the universe was designed to accommodate mankind appears in theologies and mythologies dating from thousands of years ago. In Western culture the Old Testament contains the idea of providential design, but the traditional Christian viewpoint was also greatly influenced by Aristotle, who believed "in an intelligent natural world that functions according to some deliberate design."
That is not the answer of modern science. As recent advances in cosmology suggest, the laws of gravity and quantum theory allow universes to appear spontaneously from nothing. Spontaneous creation is the reason there is something rather than nothing, why the universe exists, why we exist. It is not necessary to invoke God to light the blue touch paper and set the universe going.
Our universe seems to be one of many, each with different laws. That multiverse idea is not a notion invented to account for the miracle of fine tuning. It is a consequence predicted by many theories in modern cosmology. If it is true it reduces the strong anthropic principle to the weak one, putting the fine tunings of physical law on the same footing as the environmental factors, for it means that our cosmic habitat—now the entire observable universe—is just one of many.
Simon-Pierre Laplace was a Very Clever Man who did many Very Clever Things. Unfortunately, like many clever men, having got hold of a Brilliant Idea he was rather inclined to go off and use it on everything in sight, which led to a number of Very Odd Conclusions. In fact as far as science goes, he may well have been the original man with a hammer; taking aim at every problem as though it was a nail.
As is the way of these things economists got hold of Laplace’s ideas, converted them to their own and started developing delicate and intricate webs of theories and practices. Unfortunately, over the succeeding three hundred years they’ve failed to keep up with advances in physics and biology, rather leaving economists as the only believers in an approach that suggests we have no free will, a position from which they’re having to be dug out and defused, one unexploded theorist at a time.
When Isaac Newton published his theory of gravity he knew it contained a serious flaw; his equations didn’t exactly match what was observed. He reckoned, correctly, that the differences between his theory and the observations were down to the gravitational effect on the planets of other planets – so called perturbations, which he didn’t know how to mathematically model. He said:
“But to consider simultaneously all these causes of motion and to define these motions by exact laws admitting of easy calculation exceeds, if I am not mistaken, the force of any human mind.”
And, of course, he was mistaken. The force of Laplace’s mind successfully solved the problem. Having achieved this, though, Laplace went a stage further. Because he could exactly calculate the position of any planet he could compare this with the results of observations from astronomers. What he discovered changed human history.
It turned out that observers made errors, but they made them in a particular way – their observations fell about the actual position of the planet in a very distinctive pattern. This pattern, of course, was the ultra-familiar Bell curve or normal distribution. Laplace realised that human error was statistically quantifiable and, therefore, could be effectively eliminated from the data. This…
Winston Churchill famously said of Russian foreign policy that it was "...a riddle, wrapped in a mystery, inside an enigma." What people leave out is what followed. Churchill offered an answer: "... perhaps there is a key. That key is Russian national interest."
And so it is.
Like most crises, the crisis Russia is experiencing is over-determined, in the sense there ar...
Earlier this evening China's State Administration of Foreign Exchange's (SAFE) Wang Yungui noted "the impact of the Russian Ruble depreciation was unclear yet, and, as Bloomberg reported, "SAFE is closely watching Ruble's depreciation and encouraging companies to hedge Ruble risks." His comments also echoed the ongoing FX reform agenda aimed at increasing Yuan flexibility which The South China Morning Post then hinted in a story entitled "Russia may seek China help to deal with crisis," which which noted that Russia could fall back on its 150 billion yua...
Those who took advantage of markets at Fib levels were rewarded. However, this looked more a 'dead cat' style bounce than a genuine bottom forming low. This can of course change, and one thing I will want to see is narrow action near today's high. Volume was a little light, but with Christmas fast approaching I would expect this trend to continue.
The S&P inched above 2,009, but I would like to see any subsequent weakness hold the 38.2% Fib level at 1,989.
The Nasdaq offered itself more as a support bounce, with a picture perfect play off its 38.2% Fib level. Unlike the S&P, volume did climb in confirmed accumulation. The next upside c...
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Stocks have needed a reason to take a breather and pull back in this long-standing ultra-bullish climate, with strong economic data and seasonality providing impressive tailwinds -- and plummeting oil prices certainly have given it to them. But this minor pullback was fully expected and indeed desirable for market health. The future remains bright for the U.S. economy and corporate profits despite the collapse in oil, and now the overbought technical condition has been relieved. While most sectors are gathering fundamental support and our sector rotation model remains bullish, the Energy sector looks fundamentally weak and continues to ran...
Stocks got off to a rocky start on the first trading day in December, with the S&P 500 Index slipping just below 2050 on Monday. Based on one large bullish SPX options trade executed on Wednesday, however, such price action is not likely to break the trend of strong gains observed in the benchmark index since mid-October. It looks like one options market participant purchased 25,000 of the 31Dec’14 2105/2115 call spreads at a net premium of $2.70 each. The trade cost $6.75mm to put on, and represents the maximum potential loss on the position should the 2105 calls expire worthless at the end of December. The call spread could reap profits of as much as $7.30 per spread, or $18.25mm, in the event that the SPX ends the year above 2115. The index would need to rally 2.0% over the current level...
I officially bought 250 shares of EZCH at $18.76 and sold 300 shares of IGT at $17.09 in Market Shadows' Virtual Portfolio yesterday (Fri. 11-21).
Click here for Thursday's post where I was thinking about buying EZCH. After further reading, I decided to add it to the virtual portfolio and to sell IGT and several other stocks, which we'll be saying goodbye to next week.
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Well PSW Subscribers....I am still here, barely. From my last post a few months ago to now, nothing has changed much, but there are a few bargins out there that as investors, should be put on the watch list (again) and if so desired....buy a small amount.
First, the media is on a tear against biotechs/pharma, ripping companies for their drug prices. Gilead's HepC drug, Sovaldi, is priced at $84K for the 12-week treatment. Pundits were screaming bloody murder that it was a total rip off, but when one investigates the other drugs out there, and the consequences of not taking Sovaldi vs. another drug combinations, then things become clearer. For instance, Olysio (JNJ) is about $66,000 for a 12-week treatment, but is approved for fewer types of patients AND...
This is a non-trading topic, but I wanted to post it during trading hours so as many eyes can see it as possible. Feel free to contact me directly at firstname.lastname@example.org with any questions.
Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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