Index Cohesive Force Analysis Reveals That the US Market Became Prone to Systemic Collapses Since 2002

BACKGROUND: The 2007-2009 financial crisis, and its fallout, has strongly emphasized the need to define new ways and measures to study and assess the stock market dynamics. METHODOLOGY/PRINCIPAL FINDINGS: The S&P500 dynamics during 4/1999-4/2010 is investigated in terms of the index cohesive force (ICF--the balance between the stock correlations and the partial correlations after subtraction of the index contribution), and the Eigenvalue entropy of the stock correlation matrices. We found a rapid market transition at the end of 2001 from a flexible state of low ICF into a stiff (nonflexible) state of high ICF that is prone to market systemic collapses. The stiff state is also marked by strong effect of the market index on the stock-stock correlations as well as bursts of high stock correlations reminiscence of epileptic brain activity. CONCLUSIONS/SIGNIFICANCE: The market dynamical states, stability and transition between economic states was studies using new quantitative measures. Doing so shed new light on the origin and nature of the current crisis. The new approach is likely to be applicable to other classes of complex systems from gene networks to the human brain

Inference of financial networks using the normalised mutual information rate

In this paper we study data from financial markets using an information theory tool that we call the normalised Mutual Information Rate and show how to use it to infer the underlying network structure of interrelations in foreign currency exchange rates and stock indices of 14 countries world-wide and the European Union. We first present the mathematical method and discuss about its computational aspects, and then apply it to artificial data from chaotic dynamics and to correlated random variates. Next, we apply the method to infer the network structure of the financial data. Particularly, we study and reveal the interrelations among the various foreign currency exchange rates and stock indices in two separate networks for which we also perform an analysis to identify their structural properties. Our results show that both are small-world networks sharing similar properties but also having distinct differences in terms of assortativity. Finally, the consistent relationships depicted among the 15 economies are further supported by a discussion from the economics view point

Cultural transmission and biological markets

Active cultural transmission of fitness-enhancing behavior (sometimes called “teaching”) can be seen as a costly strategy: one for which its evolutionary stability poses a Darwinian puzzle. In this article, we offer a biological market model of cultural transmission that substitutes or complements existing kin selection-based proposals for the evolution of cultural capacities. We explicitly demonstrate how a biological market can account for the evolution of teaching when individual learners are the exclusive focus of social learning (such as in a fast-changing environment). We also show how this biological market can affect the dynamics of cumulative culture. The model works best when it is difficult to have access to the observation of the behavior without the help of the actor. However, in contrast to previous non-mathematical hypotheses for the evolution of teaching, we show how teaching evolves even when innovations are insufficiently opaque and therefore vulnerable to acquisition by emulators via inadvertent transmission. Furthermore, teaching in a biological market is an important precondition for enhancing individual learning abilitie