Petersen, Alexander M. and Wang, Fengzhong and Havlin, Shlomo and Stanley, H. Eugene Market dynamics immediately before and after financial shocks: Quantifying the Omori, productivity, and Bath laws. Physical Review E, 82 (3). 036114. ISSN 1539-3755 (2010)
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Abstract
We study the cascading dynamics immediately before and immediately after 219 market shocks. We define the time of a market shock Tc to be the time for which the market volatility V(Tc) has a peak that exceeds a predetermined threshold. The cascade of high volatility “aftershocks” triggered by the “main shock” is quantitatively similar to earthquakes and solar flares, which have been described by three empirical laws—the Omori law, the productivity law, and the Bath law. We analyze the most traded 531 stocks in U.S. markets during the 2 yr period of 2001–2002 at the 1 min time resolution. We find quantitative relations between the main shock magnitude M≡log10 V(Tc) and the parameters quantifying the decay of volatility aftershocks as well as the volatility preshocks. We also find that stocks with larger trading activity react more strongly and more quickly to market shocks than stocks with smaller trading activity. Our findings characterize the typical volatility response conditional on M, both at the market and the individual stock scale. We argue that there is potential utility in these three statistical quantitative relations with applications in option pricing and volatility trading.
| Item Type: | Article |
|---|---|
| Identification Number: | https://doi.org/10.1103/PhysRevE.82.036114 |
| Additional Information: | © 2010 American Physical Society |
| Uncontrolled Keywords: | PACS: 89.65.Gh, 91.30.Px, 89.75.Da, 05.45.Tp |
| Subjects: | H Social Sciences > HG Finance Q Science > QC Physics |
| Research Area: | Economics and Institutional Change |
| Depositing User: | Alexander Petersen |
| Date Deposited: | 04 Jul 2011 09:19 |
| Last Modified: | 18 Dec 2014 15:21 |
| URI: | http://eprints.imtlucca.it/id/eprint/422 |
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