Critical Market Crashes

This review is a partial synthesis of the book ``Why stock market crash'' (Princeton University Press, January 2003), which presents a general theory of financial crashes and of stock market instabilities that his co-workers and the author have developed over the past seven years. The study of the frequency distribution of drawdowns, or runs of successive losses shows that large financial crashes are ``outliers'': they form a class of their own as can be seen from their statistical signatures. If large financial crashes are ``outliers'', they are special and thus require a special explanation, a specific model, a theory of their own. In addition, their special properties may perhaps be used for their prediction. The main mechanisms leading to positive feedbacks, i.e., self-reinforcement, such as imitative behavior and herding between investors are reviewed with many references provided to the relevant literature outside the confine of Physics. Positive feedbacks provide the fuel for the development of speculative bubbles, preparing the instability for a major crash. We demonstrate several detailed mathematical models of speculative bubbles and crashes. The most important message is the discovery of robust and universal signatures of the approach to crashes. These precursory patterns have been documented for essentially all crashes on developed as well as emergent stock markets, on currency markets, on company stocks, and so on. The concept of an ``anti-bubble'' is also summarized, with two forward predictions on the Japanese stock market starting in 1999 and on the USA stock market still running. We conclude by presenting our view of the organization of financial markets.Comment: Latex 89 pages and 38 figures, in press in Physics Report

Spatial evolution of human dialects

The geographical pattern of human dialects is a result of history. Here, we formulate a simple spatial model of language change which shows that the final result of this historical evolution may, to some extent, be predictable. The model shows that the boundaries of language dialect regions are controlled by a length minimizing effect analogous to surface tension, mediated by variations in population density which can induce curvature, and by the shape of coastline or similar borders. The predictability of dialect regions arises because these effects will drive many complex, randomized early states toward one of a smaller number of stable final configurations. The model is able to reproduce observations and predictions of dialectologists. These include dialect continua, isogloss bundling, fanning, the wave-like spread of dialect features from cities, and the impact of human movement on the number of dialects that an area can support. The model also provides an analytical form for S\'{e}guy's Curve giving the relationship between geographical and linguistic distance, and a generalisation of the curve to account for the presence of a population centre. A simple modification allows us to analytically characterize the variation of language use by age in an area undergoing linguistic change

Bayesian dynamic financial networks with time-varying predictors

We propose a Bayesian nonparametric model including time-varying predictors in dynamic network inference. The model is applied to infer the dependence structure among financial markets during the global financial crisis, estimating effects of verbal and material cooperation efforts. We interestingly learn contagion effects, with increasing influence of verbal relations during the financial crisis and opposite results during the United States housing bubble

Linear processes in high-dimension: phase space and critical properties

In this work we investigate the generic properties of a stochastic linear model in the regime of high-dimensionality. We consider in particular the Vector AutoRegressive model (VAR) and the multivariate Hawkes process. We analyze both deterministic and random versions of these models, showing the existence of a stable and an unstable phase. We find that along the transition region separating the two regimes, the correlations of the process decay slowly, and we characterize the conditions under which these slow correlations are expected to become power-laws. We check our findings with numerical simulations showing remarkable agreement with our predictions. We finally argue that real systems with a strong degree of self-interaction are naturally characterized by this type of slow relaxation of the correlations.Comment: 40 pages, 5 figure